On Thursday, BTIG adjusted its outlook on Cars.com (NYSE: CARS), reducing the price target to $23 from $25, while sustaining a Buy rating on the company's stock. This decision follows the report of second-quarter revenues of $179 million, which fell short of the expected $181-$183 million. The shortfall was partly attributed to an unforeseen negative impact of approximately 1% from legacy website solutions contracts. Without this impact, revenue would have aligned with the lower end of the guidance range.
The company experienced a slight increase in dealer count, up by nine dealers quarter-over-quarter. However, this growth was likely curtailed by the CDK (Private) system outage, which did not significantly increase churn but did affect new sign-ups. These are typically more common in the latter half of the year. On a more concerning note, the number of subscribing AccuTrade dealerships decreased from around 1,000 to approximately 900. Despite this, AccuTrade received new endorsements from Stellantis (NYSE:STLA) Digital and Jaguar Land Rover, potentially adding an estimated 3,000 dealers.
Advertising revenue provided a positive highlight, increasing 28% to $16 million, surpassing the projection of a 24% rise. Looking ahead, Cars.com anticipates third-quarter revenue to be between $178 million and $181 million, which factors in a 1-2% headwind from the CDK issue. Adjusted for this, the revenue could have been estimated at about $181-$185 million, still below the consensus estimate of $186 million. For the full year, the company has reduced its revenue growth forecast to 4.5-5.5%, down from the previously expected 6-8%, equating to a new range of $720-727 million.
Despite the adjustments, Cars.com reiterated its target for an EBITDA margin between 28-30% for the year. While the CDK-related challenges are considered temporary, the slowdown in AccuTrade's growth is more concerning. Nevertheless, Cars.com is initiating changes to address these issues. The revised price target of $23 is based on an updated fiscal year 2025 Adjusted EBITDA estimate of $218 million and still implies a 9% free cash flow yield. Additionally, the valuation of Dealer Inspire is estimated to be worth $6-$7 per share, suggesting that the core business is trading at an attractive multiple.
In other recent news, Cars.com has exhibited a promising start to 2024 with its first-quarter earnings revealing an 8% rise in revenue year-over-year. The company's strategic focus on software and digital solutions, coupled with a boost in OEM and national sales, has been acknowledged for this robust performance. Moreover, Cars.com outperformed its own adjusted EBITDA margin estimates, reporting $53 million with a margin of 29.2%.
The firm foresees continued growth momentum into the second quarter, with projected revenues landing between $181 million and $183 million, indicating a 7% to 9% growth year-over-year. Cars.com also repurchased 500,000 shares for $9.5 million and reduced its debt to $480 million. The company ended with a dealer count of 19,381, with expectations of growth throughout the year.
Cars.com reaffirms its full-year guidance, expecting 6% to 8% revenue growth and an adjusted EBITDA margin between 28% and 30%. The company plans to focus on increasing dealer count and ARPD, integrating Accu-Trade and CreditIQ into dealer websites, and cross-selling additional products. OEM and national revenue growth is expected to accelerate, and OEM spend is projected to return to pre-pandemic levels.
Despite some challenges faced by dealers due to rising inventory levels and pricing pressures, the company's marketplace, solutions, and media business lines all saw improvement. Accu-Trade experienced accelerated growth and generated 622,000 appraisals in the quarter. Lenders are also showing increased interest in collaborating directly with Cars.com. These are some of the recent developments that have been reported.
InvestingPro Insights
In light of BTIG's recent adjustment on Cars.com, real-time data from InvestingPro provides additional context that may be of interest to investors. The market capitalization of Cars.com stands at a robust $1.1 billion, with a price-to-earnings (P/E) ratio of 10.53, reflecting a market sentiment that values the company's earnings at a rate slightly above the industry average. Notably, the adjusted P/E ratio for the last twelve months as of Q1 2024 is even more attractive at 9.03, suggesting a potential undervaluation when considering the company's profit-generating ability. Furthermore, the company's revenue growth over the last twelve months was 5.97%, indicating a steady increase in its top-line financial performance.
From an operational standpoint, Cars.com's gross profit margin for the same period was an impressive 67.83%, showcasing the company's ability to maintain profitability despite market fluctuations. This is in line with the InvestingPro Tip that analysts predict the company will be profitable this year, which is further substantiated by the company's profitability over the last twelve months. Additionally, Cars.com's liquid assets exceed its short-term obligations, providing financial stability and the ability to meet its immediate liabilities. For those interested in further analysis, InvestingPro offers additional tips to help investors make informed decisions. Visit https://www.investing.com/pro/CARS for more InvestingPro Tips.
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