You may be forgiven for questioning my description of Carsales.com Limited (ASX: CRZ) and Seek Limited (ASX: SEK) as discounted stocks, given their high price-to-earnings ratios and recent stock price outperformance. Carsales shares have increased by 25% over the last month.
However, in the just completed profit reporting season, both companies exceeded market consensus forecasts. This typically leads to a near-term re-rating of share prices to higher levels and quality stocks tend to have not just one profit upgrade, but a series of them. While a medium-to-long-term investor may have missed the initial jump in stock price, it is the longer term performance that is more relevant.
As revealed recently in the Australian Financial Review, Carsales has sealed a $126 million expansion into the South Korean car classified market. It will buy 49.9% of the online assets of SK Encar, which is the largest car trading business in South Korea. This is Carsales' biggest transaction in Asia to date. However, it already owns shares in another publicly listed company, iCar Asia Ltd (ASX: ICQ), with websites in Thailand, Malaysia and Indonesia. Just two days ago, Carsales increased its investment in iCar Asia Ltd from 19.9% to 22.9%.
The move into the South Korean market has been praised by Seek Chief Executive Andrew Bassat, who sees demographic-driven growth in Asia for over a decade. Like Carsales, Seek has seized a clear competitive advantage by securing first-mover advantage. Another similarity is that both companies are expanding into Asia and have secured industry-leading positions in Asian countries recently.
Last month, Seek purchased an Asian online employment business. In combination with exposure to Vietnam, Indonesia, Singapore, Malaysia and the Philippines, Seek will now derive 50% of group revenues from Asia.
Foolish takeaway
In my opinion, the competitive advantage both companies have secured should almost certainly result in solid and sustainable earnings growth for medium to long-term investors. The prospect of increasing growth via exposure to demographic themes in Asia lends added confidence.
It is these growth options that should entice investors to take a big-picture view by looking-through current high price-to-earnings ratios. Higher future earnings will potentially underpin even higher multiples.
