The Carsales.Com Ltd (ASX: CAR) share price will be one to watch on Wednesday.
This morning the auto listings company's shares were upgraded by a leading broker.
Is the Carsales share price in the buy zone?
According to a note out of Goldman Sachs, it believes recent weakness in the Carsales share price has created a buying opportunity for investors.
The note reveals that the broker has upgraded the company's shares to a buy rating with an improved price target of $22.60.
Based on the latest Carsales share price, this price target implies potential upside of 13% over the next 12 months excluding dividends. Including dividends, the potential return stretches to over 15%.
Why is Goldman Sachs bullish on Carsales?
The broker made the move largely on valuation grounds, noting that the Carsales share price has come under pressure since COVID-19 vaccine trial results were announced. Its shares are down 14% from their October high.
It believes that the market is concerned that the rollout of vaccines will impact demand for used cars and stifle its growth. Consumers have been buying used cars during the pandemic to avoid public transport.
However, Goldman doesn't believe investors should be worried and is forecasting strong earnings growth over the coming years.
It commented: "Although the sustainability of used car volume is a key investor focus, we remain optimistic on the outlook, believing CAR can deliver a relatively assured FY20-23E EBITDA / EPS CAGR of +11% / +14%."
This is expected to be driven largely by its dominant ANZ business and online migration driving growth in its international segment.
Domestic growth
In respect to the former, Goldman commented: "We forecast +11% 3Y EBITDA CAGR for the core ANZ Online Advertising business. Although the recent strength in the used car market presents some headwinds, we believe CAR can continue to deliver strong earnings growth."
"Driven by: (1) Return to (some) growth in Display revenues, given improving New Car sales in Australia (i.e. Dec +13%); (2) The non-repeat of the covid related dealer concessions made across FY20-21 ($40mn revenue in total); (3) ongoing c.5%+ yield growth, supported by dealer profitability and CAR strong domestic franchise (which is increasing share); (4) Increasing contribution from new revenue streams (i.e. Instant Offers); and (5) ongoing cost discipline, supporting margins," it added.
Valuation
Overall, in light of its outlook and the recent share price weakness, the broker believes Carsales' valuation is compelling.
It explained: "We believe valuation is now compelling, given: (1) CAR multiples have compressed since the vaccine announcement, despite consensus earnings upgrades; (2) Relative to AU classified peers, CAR trades at a -21% 12mf EV/EBITDA discount, the greatest level in recent history."
Carsales will release its half year results 17 February.
