Accu-Trade And OEM Synergies Spark Revenue Surge And Margin Expansion

Key Takeaways

• Expanded market presence and enhanced service offerings through dealer base growth and ARPD maintenance suggest potential for revenue increase.
  
• Introduction of Accu-Trade and strategic OEM endorsements aim at diversifying revenue streams and improving net margins by targeting new markets and increasing dealer adoption.
  
• Dependence on specific revenue streams and challenges such as cyber incidents and slow product adoption may threaten Cars.com's revenue predictability and margins.

Catalysts

An audience-driven technology company, that provides solutions for the automotive industry in the United States.

• The company delivered its 15th consecutive quarter of year-over-year revenue growth, showcasing operational resilience and adaptability, which could indicate a sustainable growth trajectory benefitting overall revenue.
  
• Significant growth in OEM and national performance (up 28% year-over-year) driven by an increase in demand from new and existing partners. This sector growth is expected to positively impact future revenues by enhancing brand strength and market share.
  
• Expansion of dealer customer base and maintenance of Average Revenue Per Dealer (ARPD), alongside strategies for further growth in this area, suggest potential revenue increases through expanded market penetration and enhanced service offerings.
  
• Introduction of the Accu-Trade product and strategic OEM endorsements for the product could lead to diversification of revenue streams and improved net margins by tapping into new market segments and increasing product adoption among dealers.
  
• Strong free cash flow growth ($56 million in the first 6 months of 2024, highest level in 3 years) and disciplined capital allocation (e.g., share repurchases and potential for debt repayment) indicate operational efficiency and financial health that could enhance earnings per share and shareholder value.

Assumptions

• Analysts are assuming Cars.com's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $75.3 million (and earnings per share of $1.11) by about September 2027, up from $25.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2027 earnings, down from 46.6x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Risks

• The unexpected impact from discrete items related to legacy solutions contracts could indicate revenue volatility, potentially impacting future revenue predictability and margins.
  
• Challenges in Accu-Trade subscriber growth, alongside a slower-than-expected adoption, may affect revenue growth expectations, particularly in services expected to drive future earnings.
  
• The CDK cyber incident and its ongoing effects could lead to temporary revenue disruptions and slower recovery in sales momentum, which might impact revenue growth rates negatively.
  
• Increased operating expenses, partly due to investments in product and technology and the inclusion of D2C operating costs, could pressure net margins if revenue growth does not meet expectations.
  
• Dependence on OEM and national revenue growth, especially with the slight quarter-over-quarter decline anticipated, might indicate risks in sustaining high growth rates, potentially affecting overall revenue and margin growth.

Valuation

• The analysts have a consensus price target of $21.36 for Cars.com based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $16.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $813.7 million, earnings will come to $75.3 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $17.65, the analyst's price target of $21.36 is 17.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.