Cars.com: Still Strong Trends And Upside Potential

Summary

• The company continues to demonstrate a stable level of operating profitability.
• Despite rising inflation and tightening macro policies, management is able to effectively manage costs.
• According to my personal calculations, the company has fundamental upside potential for the stock.

Marko Geber

Introduction

Shares of Cars.com (NYSE:CARS) continue to look strong at 15% YTD. Despite the difficult macroeconomic situation, the company continues to demonstrate both revenue growth and a stable level of operating profitability. Thus, I believe that the company retains fundamental potential for growth in the next periods based on my DCF model.

Projections

For a more accurate understanding of future cash flows, I made my own forecasts based on historical data and my personal expectations.

Revenue growth: in my forecast, I use conservative assumptions that the company will continue to show stable revenue growth at the level of 5%, which is slightly above the inflation rate.

Gross profit margin: in my model, I set the gross margin at a stable level of 82% based on historical data. I believe that the company will not be able to aggressively increase its own remuneration in view of the high competition in the sector.

Product and technology: in my model, I include a gradual reduction in costs (% of revenue) from 13.5% in 2022 to 13.3% in 2026 due to the growth of economies of scale and efficiency levels.

Marketing and sales: I'm budgeting at a steady 33.7% (% of revenue) because I don't think the company will be able to show much improvement in this line of spending as marketing cuts could put pressure on revenue .

General and administrative: with increasing economies of scale and better governance, I expect spending (% of revenue) to drop from 10.6% in 2022 to 10.2% in 2026.

Quarterly projections:

Personal calculations

Yearly projections:

Personal calculations

Valuation

To value Cars.com, I prefer to make assumptions about future cash flows and build a DCF model because:

1) The company operates in a clear and stable market where investors can make assumptions about the company's market growth rate and market share 2) The company has a history of reporting and observations based on which I can model future operational and financial performance

To build a DCF model, I use the following inputs:

WACC: 11.1%

Terminal growth rate: 3%

Personal calculations

Drivers

Macro: rising consumer spending on the back of a recovery in consumer confidence and lower interest rates could have a positive impact on consumer spending in the automotive segment, which would have a positive effect on business revenue.

Market share: effective marketing spending and new M&A can support the company's revenue in future periods.

Margin: an effective management approach to managing operating costs can support the operating profitability of a business.

Risks

Macro: decreasing consumer confidence and falling real consumer incomes could lead to lower spending on new and used vehicles, which could have a negative impact on the company's revenue in future periods.

Competition: increasing competition, increased marketing activity and dumping can have a negative impact on revenue growth, market share and profitability.

Conclusion

Despite the still difficult macroeconomic conditions, the company continues to demonstrate revenue growth and maintain operating margins. I believe that the recovery of consumer confidence, the company's stable market position and effective M&A will support the growth of the company's business, and the increase in economies of scale will help maintain effective management of operating expenses. In my personal opinion, the fair share price is $24 with an upside potential of 52%.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CARS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.