Carsales.com: Driving up profits, shares worth a test drive

Carsales.com Limited (ASX: CRZ) today announced an increase in first half profits by 20% to $33.1m. The shares are worthy …

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 15, 2012 3:16 pm AEDT

Carsales.com Limited (ASX: CRZ) today announced an increase in first half profits by 20% to $33.1m. The shares are worthy of consideration, writes The Motley Fool.

Operating revenues were up 22% to $87.4m. That's an impressive profit margin of 38%. Net operating cashflow was good as well, growing by 26% to $29.7m. Despite these impressive results, the stock is down slightly today. Who said Mr Market had to be rational?

The company also declared a fully franked interim dividend of 11.3 cents, payable on 11^th April 2012. Carsales anticipates performance in the second half of FY 2012 to be similar to or slightly above the first half's result.

As my colleague, Dean Morel mentioned in this article last year, Carsales dominates the online automotive classified advertising business.

75% of all time spent looking at automotive classifieds websites around Australia was done on a Carsales owned site. Mobile traffic to Carsales websites is almost double the total of its next three main competitors, Fairfax Media Limited (ASX: FXJ), News Corp (ASX: NWS) and Telstra Limited (ASX: TLS) desktop sites traffic, as this graphic from the carsales presentation shows.

Carsales.com continues to defend its moat with the release of more products, and expects to see increased levels of competitor visibility during the second half of the FY 2012. As Dean mentioned in his article, "high margins and return on capital attract competitors like flies to a picnic". Return on Equity for 2011 was 59%, and likely to be similar in FY 2012.

The company still has no debt, and a cash balance of $25.6m as at December 2011, down slightly from $32.8m at June 2011, mainly due to the share buyback the company has undertaken since June 2011.

The Foolish bottom line

Based on my estimates the company is trading on a forward P/E of 18, and a forecast dividend yield of 4.3%. Delivering growth of 20% per year (at least) means that P/E is not overly expensive.

As Dean mentioned in his article, if Carsales continues to throw off cash, deliver high returns on capital and generate profit margins of 38%, it's definitely a stock worthy of further consideration.

Attention: If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

More reading

Motley Fool contributor Mike King doesn't own shares in Carsales.com. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.