Carsales Australia

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of carsales.com Ltd (ASX:CAR) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at carsales.com as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.6%, which is based on a levered beta of 1.123. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Carsales Australia

Download 🔥 https://shurll.com/2y3K9L 🔥

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For carsales.com, there are three further factors you should further examine:

Those following along with carsales.com Ltd (ASX:CAR) will no doubt be intrigued by the recent purchase of shares by Walter Pisciotta, Co-Founder & Non Executive Director of the company, who spent a stonking AU$12m on stock at an average price of AU$19.95. While that only increased their holding size by 7.1%, it is still a big swing by our standards.

Notably, that recent purchase by Walter Pisciotta is the biggest insider purchase of carsales.com shares that we've seen in the last year. That implies that an insider found the current price of AU$21.90 per share to be enticing. Of course they may have changed their mind. But this suggests they are optimistic. We do always like to see insider buying, but it is worth noting if those purchases were made at well below today's share price, as the discount to value may have narrowed with the rising price. In this case we're pleased to report that the insider purchases were made at close to current prices. Notably Walter Pisciotta was also the biggest seller.

Happily, we note that in the last year insiders paid AU$20m for 1.06m shares. But insiders sold 330.00k shares worth AU$7.3m. In total, carsales.com insiders bought more than they sold over the last year. You can see a visual depiction of insider transactions (by companies and individuals) over the last 12 months, below. If you click on the chart, you can see all the individual transactions, including the share price, individual, and the date!

For a common shareholder, it is worth checking how many shares are held by company insiders. Usually, the higher the insider ownership, the more likely it is that insiders will be incentivised to build the company for the long term. It's great to see that carsales.com insiders own 4.8% of the company, worth about AU$389m. Most shareholders would be happy to see this sort of insider ownership, since it suggests that management incentives are well aligned with other shareholders.

It's certainly positive to see the recent insider purchase. And the longer term insider transactions also give us confidence. When combined with notable insider ownership, these factors suggest carsales.com insiders are well aligned, and quite possibly think the share price is too low. That's what I like to see! In addition to knowing about insider transactions going on, it's beneficial to identify the risks facing carsales.com. At Simply Wall St, we've found that carsales.com has 4 warning signs (2 are a bit unpleasant!) that deserve your attention before going any further with your analysis. 2351a5e196