Carsales share price down 26% since February. Is it now a good buy?

Australia’s leading online automotive classifieds website Carsales.Com Ltd (ASX: CAR) has seen a partial rebound in its share price since late March, but is still down 26% since mid-February.

Does this now provide investors with a good buying opportunity?

Sharp downturn in sales volumes

Social distancing and isolation measures implemented to combat the coronavirus pandemic has unsurprisingly translated to a reduction in buying and selling activity for Carsales. Therefore, this has impacted classifieds listing sales volumes and revenues.

In a recent trading update in late April, Carsales revealed that between 10 March 2020 and 21 April 2020, seller and dealer used car lead volumes were down very sharply by approximately 25% compared to normal levels. 

However, on a positive note, traffic on carsales.com.au had remained resilient over the prior month, and private seller and dealer used car lead volumes were growing solidly.

Well-positioned to ride out the crisis

Despite the enormous challenged posed by the crisis, Carsales appears to be taking all the necessary steps to mitigate the negative impact of the coronavirus pandemic on its operations. This includes the initiation of cost-saving measures such as reducing board executive remuneration, temporarily standing down around 250 employees and reducing outdoor brand marketing.

Also, Carsales’ debt and liquidity positions appear to be reasonably solid, considering the unprecedented challenges that the automotive industry is currently facing. At the end of March, Carsales had a relatively manageable net debt position of $355 million and a relatively strong liquidity position with around $190 million in available cash.

Is the Carsales share price a buy?

Despite the current market downturn, I believe that Carsales does offer investors a good long-term buying opportunity. That said, more share price volatility could still be around in the months ahead.

It is important to take into consideration that the automotive sector is highly impacted by economic cycles, but has always proven to be fairly resilient. Whilst it can suffer sharp downward swings in very challenging times, such as the one we are in now, it typically bounces back fairly quickly once market conditions improve.

Already there are signs that market conditions for Carsales may improve in the not too distant future. With the release of the Federal Government’s 3-step plan to reopen Australia by late July, this is likely to provide a welcome boost to new car sales in the months ahead, which could translate to a further uplift in the Carsales share price.

I also believe that Carsales’ industry leadership position in the Australian market, along with its geographic diversification, positions it well to outperform the S&P/ASX 200 Index (ASX: XJO) over the longer term. In particular, the international growth potential for Carsales appears to remain strong, especially in the fast-growing South Korean market.

More reading

• These were the top 10 ASX 200 shares over the last year
• Brokers may be upgrading this ASX stock even as it delivered a plunge in profits
• Is it time to invest in shares or wait on the sidelines?
• In a post-COVID world, could Australia be the next superpower?
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor Phil Harpur owns shares of carsales.com Limited. The Motley Fool Australia has recommended carsales.com Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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