Why Morgan Stanley is bullish on Carsales (and what other brokers think)

Morgan Stanley upgraded its 12 month price target for Carsales Limited (ASX:CAR) on Tuesday. 

The investment bank has given CAR a target price of $26.50, up from $26.00. 

That reflects a Total Shareholder Return (TSR) of 17%, using a close price of $22.68 at end-of-trade on Monday 13 February 2023. 

Why are Morgan Stanley analysts bullish? 

“Carasales’ competitive position in Australia has never been stronger,” analysts wrote, positing that Australia’s auto cycle is de-synchronising from the broader economy. 

The Morgan Stanley analysts behind Tuesday’s note are Andrew McLeod, Chris Boulus and Angela S. Sutcliffe. 

“Online classified peers in the real estate and jobs [sectors] are coming off record volumes enjoyed in CY2021-22, but the auto market and CAR are not.” 

In short, Morgan Stanley analysts highlight a lesser volume of new models arriving in Australia since COVID hit, meaning total car sales in Australia have become subdued. 

And that is where the upside proposition lies. Morgan Stanley sees demand remaining elevated as global supply “slowly returns.” 

Stronger US prices help story 

Used car prices rose in the US recently, to the surprise of economists. Morgan Stanley sees this as a simple function of demand outpacing supply. 

Morgan Stanley has increased its private revenue assumption for the end of the 2023 financial year by 10%, even after a downgrade to net profit after tax (NPAT) assumptions for FY23-25. 

“After seven straight monthly declines, the [used car index] rose 2.5% month-on-month and remains 45% higher than in December 2019.” 

Carsales highlighted it was continuing to benefit from inflationary price hikes in its latest report, too, even after increasing yields by 6% in 1H 2023. 

“Our bull case value of A$37.0/share and bear case value of A$12.0/share remain unchanged,” analysts wrote. 

What about the other brokers?

Morgan Stanley aren’t the only ones looking at Carsales’ latest results. 

Other coverage includes: 

• Goldman Sachs—NEUTRAL—price target of $23.00—TSR of 1.4%

• Macquarie—OUTPERFORM—price target of $24.50—TSR of 11.4%

• Ord Minnet—HOLD—fair value of $22.80—current price $23.07

Carsales' one year charts