Here's Why We Think carsales.com (ASX:CAR) Is Well Worth Watching

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like carsales.com (ASX:CAR). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide carsales.com with the means to add long-term value to shareholders.

View our latest analysis for carsales.com

How Fast Is carsales.com Growing?

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. It certainly is nice to see that carsales.com has managed to grow EPS by 34% per year over three years. If growth like this continues on into the future, then shareholders will have plenty to smile about.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. While carsales.com did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for carsales.com.

Are carsales.com Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Despite AU$7.3m worth of sales, carsales.com insiders have overwhelmingly been buying the stock, spending AU$8.5m on purchases in the last twelve months. An optimistic sign for those with carsales.com in their watchlist. It is also worth noting that it was Co-Founder & Non Executive Director Walter Pisciotta who made the biggest single purchase, worth AU$5.0m, paying AU$17.75 per share.

On top of the insider buying, it's good to see that carsales.com insiders have a valuable investment in the business. Indeed, they have a considerable amount of wealth invested in it, currently valued at AU$402m. Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Cameron McIntyre is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations between AU$6.1b and AU$18b, like carsales.com, the median CEO pay is around AU$4.0m.

carsales.com's CEO took home a total compensation package worth AU$3.5m in the year leading up to June 2022. That seems pretty reasonable, especially given it's below the median for similar sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Does carsales.com Deserve A Spot On Your Watchlist?

For growth investors, carsales.com's raw rate of earnings growth is a beacon in the night. Not only that, but we can see that insiders both own a lot of, and are buying more shares in the company. So it's fair to say that this stock may well deserve a spot on your watchlist. Before you take the next step you should know about the 4 warning signs for carsales.com (2 can't be ignored!) that we have uncovered.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of carsales.com, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.