Everyone likes the idea of investing in a quality business. In fact, you have to wonder why you would invest in any other kind of business. Even better than a quality company, is a quality company that is able to compound its returns over long periods of time. Investors who target these types of companies are looking to buy and then hold the investment for a long period and let their returns compound over time as the company grows its business.
I have written a number of articles about quality compounder stocks, analysing stocks that are consistent with the Quality Compounder screen as presented by Stockopedia contributor Roland Head in his article Building a screen to find Compounding Quality stocks. Following the recent reporting season a couple of new stocks have come into the screen when applied to the ASX and NZX. These include carsales.com (ASX:CAR) and Idp Education (ASX:IEL).
Carsales.com needs little introduction. As the name suggests, it is a website for the buying and selling of cars. But there is a bit more to it. They operate across four main geographies. Australia, USA, Brazil and Korea. Over 50% of their revenue is now derived outside Australia. In each of its markets they are the number one marketplace in the space where they compete. In the US, they do not list cars, but rather trucks, RVs, powersports and equipment. The Australian market also covers those along with boats.
Market position
Source: carsales.com, Full Year Results Presentation - Year ended 30 June 2023, 14/8/2023
The business derives revenue in a number of ways. First is through vendors paying to advertise, both dealers and private sellers. The majority of revenue comes from dealers. Next is selling advertising on the site, and there are also a number of ancillary services that are provided.
Albert Einstein said, “Compound interest is the eighth wonder of the world; he who understands it, earns it, he who doesn’t pays it.” Carsales have increased their revenue at a compound annual growth rate of 15% over the last 16 years. Something compounding at 15% doubles in value every five years. Consequently Carsales have grown their revenue from $100 million in 2007 to $942 million pro-forma today (this assumes the full amount from the US and Brazil businesses in which…
