Analysts Still Hot On Cars.com Despite Revenue Declines

Cars.com Inc (NYSE: CARS) has nearly recovered from its fourth-quarter earnings plunge.

Management reported softer-than-expected revenue with underperformance in multiple metrics. Still, Barrington considered Cars’ results a signal of progress.

The bottom line came in at more than double analyst forecasts, and Cars realized boosts in average monthly unique visitors, traffic visits and mobile traffic, and increased monthly average revenue per dealer (ARPD).

Q4 and 2018 Results

The top-line miss included a 19-percent decline in national advertising revenue and 60-percent decline in wholesale revenue, which Barrington attributed to sluggish new vehicle sales and affiliate conversions, respectively.

Dealer customers also fell 2 percent sequentially and 6.5 percent year-over-year.

For the entire year, both free cash flow and net cash from operating activities suffered declines. The former posted $25.5 million in drag from early conversion of affiliate markets.

“We remain somewhat concerned over elevated, albeit improving, dealer churn levels and what we see as a potentially rocky affiliate transition with Gannett,” Benchmark analysts wrote in a note. “...While a recovery in dealer count remains a show-me story, we can buy into increasing ancillary product sales, particularly DI, helping stem overall revenue declines, with a wide variance of outcomes in National Ad driving the remainder of the delta.”

Looking Forward

The revenue struggle isn’t expected to end soon. Management guided for 2019 decline in growth on lower dealer counts and softness in vehicle retail. These factors, combined with the continued rollout of Digital Solutions, are seen to yield adjusted margins of 32-34 percent in earnings before interest, tax, depreciation and amortization.

“While 2019 guidance was a mess as expected, we give management some credit for at least trying to thread the impossible needle of providing a medium-term outlook that was, on the surface at least, neither too conservative nor too aggressive,” Benchmark wrote. “Several intrinsic tech changes, along with the salesforce restructuring, also has Cars on a path to at least potentially achieving that outlook, dependent, of course, on execution and a slew of other factors.”

Benchmark expects Starboard’s guidance reaction to influence the stock’s near-term performance.

Barrington Research maintained an Outperform rating and a $40 to $45 target. Benchmark maintained a Hold rating.

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