Top broker tips Carsales (ASX:CAR) share price to race 20% higher

The Carsales.Com Ltd (ASX:CAR) share price could race 20% higher from here over the next 12 months according to one top broker…

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The Carsales.Com Ltd (ASX: CAR) share price is defying the market selloff and pushing higher on Wednesday.

In afternoon trade, the auto listings company's shares are up 1% to $17.26.

Why is the Carsales share price pushing higher?

Today's gain appears to be a delayed response to a bullish broker note out of Morgans on Tuesday.

According to the note, the broker has upgraded the company's shares to an add rating with an improved price target of $20.82.

Based on the current Carsales share price, this implies potential upside of ~20% over the next 12 months excluding dividends.

And if you include the 56 cents per share fully franked dividend it expects in FY 2021, this potential return stretches to almost 24%.

What did Morgans say?

Morgans has been looking into Carsales' US$624 million acquisition of US-based Trader Interactive and likes what it sees.

This is even after accounting for the "full" price the company is paying for the digital marketing solutions and services provider to the commercial truck, recreational vehicle, powersports, and equipment industries.

Morgans said: "In one of the better deals for PE [private equity], CAR's acquisition of a 49% stake in Trader Interactive (TI) for US$624m at a trailing EV/EBITDA multiple of 26.5x (a 28% premium to their comparative multiple) appears quite full (PE having paid US$680m for the whole asset in 2017, with some acquisitions added since)."

"Having gotten our head around the above, we are supportive of the deal and see the strategic merit. TI appears to have strong market positions in a number of verticals, in a large addressable market (4x domestic auto, 16x domestic non-auto) with upside from increased dealer penetration and improved monetisation of existing dealers."

"We back CAR's expertise to deliver product and user experience improvements in TI to drive topline growth ahead of historic rates. Additionally, the multiple paid is only slightly above the most recent large comparative transaction (the 26.1x trailing multiple paid for AutoScout24 in early 2020)."

The broker concluded: "With robust earnings growth forecast (15% EPS CAGR FY21-23) and CAR trading at a much lower premium to its 10yr historic trading averages than the other larger classifieds players, we see both relative and absolute value in CAR, moving to an Add rating."

Overall, this could make the Carsales share price worth considering at the current level.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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