Quick Summary of 2 Businesses I’ve Studied Recently
CARS- Cars.com recently completed the spinoff from their parent company Tegna Inc, and started trading as its own publicly traded company on June 1st. Geoff and I did some research on the company a little over a month ago and we have been watching from the sidelines ever since. Cars.com is a very capital-light, cash flow generative company with a solid brand and one I would say is not going to “go-away” within the next 10 years. This all being said, they operate and compete in a very crowded space and their competitors are spending much more of a % of revenue on marketing than Cars.com is. Geoff and I thought a lot about this and we couldn’t exactly figure out why.
Their Main Competitors Are..
- Truecar
- CarGurus
- Autotrader
From looking at the other competing company websites I would say that Truecar and Cars.com is the best-looking website out of the group. Here is a quick breakdown of their financials where you will see the % of revenue spent on marketing.
| Cars.com | TrueCar | CarGuru | |
| Sales | 309.8 | 157.6 | 143.3 |
| Cost of sales | -4.7 | -13.5 | -7.7 |
| Marketing | -109.5 | -89.1 | -104.6 |
| EBIT | 56.2 | -13.6 | 12.2 |
| Marketing % of sales | 35% | 57% | 73% |
| EBIT Margin | 18% | -9% | 9% |
Management is forecasting revenue to finish down -1% in 2017, which obviously is not too appealing to many investors. This being said, CFO Sheehan has said in an earnings call that they expect the business to grow in 2018. After the spinoff, Cars.com opened at $25.34 and now currently trades at $24.47. The stock probably has not performed well since the spinoff due to the parting gift to Tegna of $650m. But, due to the companies cash flow generative nature, I don’t believe this will be an issue going forward. Also, I believe the stock currently is priced as a “no growth going forward” type of stock. If they can resume to top line growth and continue to produce significant free cash flow, I think if the stock falls back down to the $20 per share area it can make for an interesting investment over the next 2-5 years. This company is on my watch list of a company I would like to own at a future price if given the chance by Mr. Market.
| Market Cap ($Mil) | EV/EBITDA | P/S | EBITDA MARGIN | |
| Cars.com | $1,755 | 10.1x | 1.17 | 37% |
| TrueCar | $1,180 | N/A | 3.43 | -5.70% |
| CarGurus | $2,266 | 99.4x | 10 | 10.40% |
| Auto Trader | $4,210 | 16.3x | 10.57 | 67.80% |
Papa John’s
PZZA – I started to get interested in learning more about Papa John’s business because first, I love pizza (who doesn’t?) and second, because I saw in the news that Papa John’s was blaming the NFL on slowing pizza sales, which caused sort of a media frenzy. Although I don’t know if Papa John’s blaming the NFL on slowing pizza sales is a valid claim or an excuse, I’m not exactly sure if the stock is exactly cheap. In addition, Domino’s Pizza is definitely a far superior business than Papa John’s is. Domino’s is more like a tech company that sells pizza. I order from Domino’s frequently and I know Geoff does also. Their prices are cheap and within a few seconds of pulling up the app on my iPhone I can order dinner through the touch of a button. Papa John’s is down 34% YTD while Domino’s is up only 9% (though they’re trading closer to its 52-week low of $156.26). Geoff and I did a very rough, back of the envelope SOTP analysis when we went over Papa John’s a couple weeks back and yielded a rough estimate of $2.09B in value for the business with some aggressive assumptions. Once accounting for their debt, we came to market value of $1.7B, or $48.51. With the stock currently trading at $57.90, we did not decide to dive deeper.