Cars.com (NYSE: CARS) Zooming Higher After Earnings

A Perfect Play For Today’s Times

Cars.com (NYSE: CARS) rocketed higher this morning after delivering a much-better-than-expected earnings report. After digging into the company I am not surprised, not surprised in the least. Considering results from Carmax (NYSE: KMX), Sonic Automotive (NYSE: SAH), and Vroom (NYSE: VRM) the thing I am surprised about is how long it took the market to get interested. To say that Cars.com is a perfect play for today’s times is an understatement. The company operates a digital marketplace for auto sales and sits at the juncture of multiple trends driving today’s consumers.

To start, U.S. consumers have been turning to used and pre-owned certified cars in recent years. The rising cost of new cars is only one reason but fundamental to the story. On top of that, consumers have been turning toward digital and that trend was accelerated by the COVID-19 pandemic. What the pandemic did for us is prove the digital works. What that means for the average business is the need for an eCommerce presence. What Cars.com does is provide the platform so smaller and independent operators, even large-scale operators, can access eCommerce without the hassle.

The Results, Oh What A Relief

Cars.com reported a decent quarter when adjusted for one-off events. The one-off events, to keep things in the proper perspective, include invoice credits to marketplace clients intended to help them during the pandemic. The credits, 50% in March and 30% in May and June, are responsible for a 31.2% decline in net revenue that otherwise would have shown growth. On the bottom line, GAAP EPS shows a loss for the quarter but it and revenue were both better than consensus and bolstered by the adjusted results. At the adjusted level, EPS of $012 beat by $0.29.

Website metrics are positive and point to steadily improving results as the year progresses. Total traffic increased 10% from the previous year, mostly on mobile platforms, driven by a 6% increase in new unique visitors. Leads, visitors that convert to potential clients, increased 17% proving the platform value to its dealer clients. Regarding mobile, mobile accounted for fully 75% of the quarterly revenue. The only bad news is the company lost about 10% of its marketplace customers, a loss that will drag on revenue growth as the rebound continues.

"We executed extremely well in a difficult period by continuing to deliver efficient vehicle sales, industry-leading digital solutions, high-value organic traffic, and an essential online marketplace as consumers and dealers gravitate online. This quarter's results also benefited from swift management actions taken to reduce operating expenses and strengthen our liquidity, while still providing our dealers meaningful financial support, aligned with our longstanding dealer advocacy," said Alex Vetter, President and Chief Executive Officer of CARS.

The Technical Outlook: A Short-Squeeze And Baby Bull Market

The technical outlook for this stock is good, especially if you like markets that are turning around and reversing. Today’s action, aided by a high 14% short-interest, has the shares up 20% which pretty much means a bull market if you put stock in things like that (I do). The candle is a bit iffy, it’s a large long-legged doji as I write this article, but supported by the indicators and sets a new high so bullish in bias if nothing else. Resistance at the $8.00 level is due to the pandemic and not the company’s fundamentals so not likely to last long, in my opinion.

Longer-term, today’s action brings targets near $12.50 and $17.50 into play. These levels mark the bottom and top of an open price-window that should attract both buyers and sellers. Looking at things from the valuation perspective, Carmax trades at 31X forwards earnings and Sonic Automic 16 (Vroom hasn’t posted real profits yet), which makes Cars.com’s 10X a deep value. Assuming a multiple expansion is in the works, Cars.com come could gain 4 to 20 price multiples for a range of $12.80 to $24. Whatever the case, holders of the stock are looking at 55% to 224% gains over the coming 6 to 12 months.