Cars.com: Depressed Valuation Despite Inflection Year Ahead

Steve Gorelik of Firebird Management presented his in-depth investment thesis on Cars.com (US: CARS) at Best Ideas 2020.

Thesis summary:

Cars.com is a digital automotive marketplace that connects car shoppers with dealers and car manufacturers. The key purpose of the website is to empower shoppers with resources to make an informed buying decision.

Since spinning out of Tegna two years ago, the Cars.com has struggled as a public company, with declining revenue and customer numbers due to intense competition and a flawed sales network that partially relied on newspaper companies to sell their product. 2019 was a turbulent year with a failed sales process and significant costs incurred on restructuring the sales network away from affiliate (newspaper) relationships.

The shares recently traded at distressed levels, including a normalized 2019 FCF yield of 14% and EV/EBITDA of 8.5x, which is roughly one-fourth of comps levels. 2020 promises to be an inflection year, with easing competition and the elimination of one-time charges. Cars.com has one of the more interesting risk/reward propositions in the market, with estimated IRR of 30+% over a three-year holding period.

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About the instructor:

In addition to being Head of Research at Firebird Management, Steve Gorelik is the Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the boards of Teliani Valley (Georgia), Arco Vara (Estonia), and Pharmsynthez (Russia). He speaks Russian, English and his native Belarussian.