Editors’ Note: This is a transcript version of our podcast yesterday on Cars.com. We hope you find it useful.
Introduction
Daniel Shvartsman: This week on Behind The Idea, we take a step into a potential value trap by looking at Cars.com (CARS). We take a short thesis from Seeking Alpha author BOOX Research and wonder if things are as bad as they look for the company on the surface. I wonder about the potential headwinds, the used car industry faces as a whole.
DS: How valuable will a used car be 5 to 10 years from now, if you are at an advent of increased autonomous technologies or increased electrification or whatever other major changes in the industry?
DS: Mike revisits work he did on the company a couple years ago to lay down a personal valuation manifesto.
MT: But I got made fun of in the comments for saying I think that this deserves a PE of 10. And I think one of the beauties of investing is that I just get to make that decision for myself, that — that that’s the multiple I think it is appropriate.
DS: The thing about value traps is that there’s something there, but it’s unclear whether that value will ever get out to shareholders before the business bleeds away, which makes for an interesting short case too. Is that what we have on our hands with Cars.com, we break it down on Behind The Idea.
Podcast
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MT: Welcome to Behind The Idea. I am Mike Taylor.
DS: And I’m Daniel Shvartsman.
MT: Today we are covering Cars.com, ticker symbol CARS. We’re taking a short idea from BOOX Research, B-O-O-X Research on the company to break down a competitive environment and a potential value trap. And while Daniel and I often come from a value orientation, we’ve been called value hipsters by ourselves and others.
This week, we’re going to see what differentiates deep value from value traps, and whether investors can spot that difference ahead of time. Before we begin, Behind The Idea is the podcast that looks at what makes great investment analysis work based on ideas from the Seeking Alpha ecosystem. Neither Daniel nor I have any positions in any stocks we expect to discuss. And as ever, nothing on this podcast should be taken as investment advice of any sort.
So Daniel, BOOX Research has a short case on Cars.com. Get it started, what’s going on.
DS: The author has a really crisp argument here for why we should be bearish on Cars.com. We have industry level issues, declining car sales in the U.S. and globally. We have increased competition from newer generation web firms such as CarGurus (CARG) and Carvana (CVNA). And also from historic used car dealers, like CarMax (KMX), and then AutoNation (AN), also a player in the industry. And so they’re operating in an increasingly crowded space.
And the numbers support the fact that they are not apparently the winner. The revenues for 2019 are guided to be likely a little bit down. They are — meanwhile their competitors are growing them. And so it doesn’t seem like they’re gaining share. They’re not gaining profitability. And so it just — it’s sort of a perfect storm of bottom up problems, challenges with their industry and with their operations and top down problems or challenges with the broader macro and sector climate.
MT: Yeah, and so you mentioned competition and that’s clearly and I think the total market in this space is really important. But let’s kind of quickly — like talking about what Cars.com’s business model is? So my understanding is Cars.com, their primary customers are car dealerships. And what they offer car dealerships is basically the audience of people who type in Cars.com to the URL who are potential buyers of cars. And so they’re a sort of gigantic sales funnel for all the car dealerships in the United States.
So when we talk about car — when we talk about competition, we’re kind of talking about competition in the area of generating leads for car dealerships. And I guess you could think of that as either a very narrow market, in the sense that there are a few websites that are trying to aggregate these audiences of car buyers. But on the other hand, there are so many people who are interested in driving vehicle sales that you could also consider it to be a very large and fractured and competitive market.
DS: Yeah, I thought it was interesting — or one area that I think the author may have sort of elided as far as breaking down the competitors is I imagine that they have different models in terms of where do they get their revenue? What are they? What are they trying to bring together? Cars.com talks a lot about a two sided marketplace, trying to bring the buyers and the sellers, but then yeah, over, I think it was over 80% of their business is from dealers. And then most of the rest is from national brands. So they’re really trying to bring customers who might buy the cars, but they’re making their money from the sellers.
And so you don’t Carvana’s model or CarGurus — I think CarGurus is pretty close to Cars.com but TrueCar, I think has in the past has been viewed as competing with the dealers a little bit. So how you think about all those different parts? But at the end of the day, they’re all just trying to help people find the right car for them and buy it. And that to me, when you sort of think about the market that way, there’s a clear constraint on what is available there. And that also makes me think of probably some degree why some entities can grow so fast, while Cars.com, which has grown their revenue at a decent clip over the last few years. But in Q1, they were down to 3% or 4%. And then, as stated their guidance is for slowing revenue.
And so — but there’s differences in how you’re sort of attacking that broader pie, but I have to think that there’s — there’s not going to be sudden new value to come from helping people make a transaction for their car. And so then, yeah, you have to kind of consider what are the different ways that people are finding a car. What different matchmaking is there in the industry?
MT: Right. So with that, let’s get into some of these key points that BOOX makes. So one of the main things that you just highlighted was declining revenue growth, and BOOX makes the case that Cars.com is losing market share, additionally. So when I looked at the revenue growth decline, I noticed that there had been another decline in revenue growth in 2018, according to the chart that he shows. And I’m wondering, maybe we’re more in like a steady equilibrium, where things fluctuate around. If it’s true that the market is more or less mature, then potentially these combatants are just going to kind of fight each other and make incremental gains that will then be given back at a later time.
I wasn’t — so I guess that it is our old chestnut of cyclical versus secular, temporary versus long term. I didn’t find that to be an overly dramatic thing. I think it’s like, kind of the case being made here is that BOOX has identified sort of the beginning of what will be a continuing trend going downward in terms of Cars.com market share, or it’s just its revenue growth. What did you think?
DS: Yeah, I think we’re setting aside the cyclical and the top down stuff. But the fact that CarGurus — I pulled up their year-over-year quarterly. And they grew at something like 30% year-over-year in Q1. And they seem to be able to continue to transact and continue to drive new revenue growth. And so I think there’s something to be said for the case that it’s not just a matter of equilibrium. It does seem like Cars.com — I think the author uses at some point, the phrase eating their lunch. We’re not getting into the specifics at the dealer level, who’s going where. But I think there’s a case, the author cites that there are only 43,000 dealerships in the U.S., per CarGurus.
And so like, when you have that sort of — that’s who’s going to pay you money, and then there’s only so much — there’s only so much you can expand beyond that. Yeah, I don’t know. I think there — I think you’re right, there’s probably some equilibrium of the TAM here, the total addressable market. It doesn’t seem like a superfast growth market. And it’s interesting, because Cars.com comes out of — was spun off from old Media Century was a, I think, a Gannett property originally.
MT: TEGNA (TGNA).
DS: Right. Yeah. And so it was spun out of TEGNA. I think it’s, you know, it’s essentially a modern form of classified ads online. But there’s not a clear — I don’t know exactly how Carvana and CarGurus and the other faster growers spin it, but a lot of this has moved online. I don’t think we’re at that sort of adoption phase to where you start doing stuff online. I think a lot of it is already there. And so it doesn’t seem like there’s a tailwind from that, that Cars.com could take advantage of. It doesn’t seem like the cycle is super favorable for them either. And then, when you see other teams putting up numbers on the board, that are outpacing your numbers, or when your numbers are kind of going backwards.
And yeah, I think it’s — I think there’s something to be said for the equilibrium. But I also think it does seem like it’s unduly impacting Cars.com unless there’s specific strategic implications or decisions they’re making to refocus or whatever else.
MT: I’m glad you mentioned that, Daniel, because I looked at their Analyst Call for the quarter, and I don’t know how much credit to give to any of these things. But management did mention a couple of things. So one is that they reconfigured and retrained the sales force to — they had bought this company, I guess, I forget it. It had a cool name, I forget what it’s called Dealer Inspire
DS: Dealer Inspire.
MT: Dealer Inspire. Spire, Inspire your dealer, your car dealer. Inspire your car dealers.
DS: Only in the car.
MT: Only in the car market, yeah. Dealer Inspire, they got this company. If you go to that website, a very slick startup, basically positions itself as a kind of data and analytics management for car dealerships. And Cars.com bought this company and some of the things they talked about on the call is sort of two things going on. One, they’re retraining the sales force. I would imagine that some of that has to do with this new capability that they’ve bought with tracking and managing dealer analytics as a kind of value-added service that they can provide dealers as they’re also bringing customers into the funnel.
So the story that management would and did tell, essentially, is that like we had some churn, because this is a very relationship-driven customer dynamic between us and the dealerships, when we sort of shifted into this new sales pitch, in this new value proposition, related partly to the acquisition, we expected to see some turnover, some churn in our client base. And they’re guiding for a return to growth in Q3 of this year.
So that’s one sort of thing that BOOX, I think, doesn’t really discuss in the article very much, but is a potential explainer. I — you’re supposed to be skeptical when you listen to management on these calls, and they’re generally going to be trying to paint the best picture possible. But if you believe that the acquisition is a value add and differentiator, can sustain a moat and keep Cars.com ahead of its competition in terms of share and awareness, and all those other KPI numbers that do seem to be going in a decent direction. Then maybe this is a sort of temporary headwind. Do you buy it?
DS: Yeah, it’s interesting, looking over the conference call, as you were saying that, and we were talking earlier about how Cars.com is a website. We work for Seeking Alpha, which is website and so some of the KPIs they cite their search engine optimization traffic, which I was also looking back at the Kase Learning Conference that we covered in December and Kerrisdale Capital had come out short, CarGurus and said, how much CarGurus is levered to that sort of Google power.
MT: Cars probably is better. Well, so let’s yeah — let’s just get into this. I was quick tangent. I was listening to Meb Faber’s podcast, yesterday and he had David Huber, Saber Capital guy. Is that his name? He had a portfolio manager on…
DS: John Huber, I think.
MT: John Huber. So yeah, John Huber, he had on, who’s a concentrated value investor. And they were talking about Campbell Soup (CPB). And how Campbell had this great moat for a long time that was just built on brand awareness and marketing and shelf placement in grocery stores. And the way it worked was, Campbell’s was like — what’s — what people thought of, when they thought of soup. And then it was the first thing they saw, when they went into the grocery store. And that gave Campbell’s this great pricing power on its soup.
And that expanded margin allowed them to spend a lot of money on sales and marketing, expenses to help maintain that awareness and maintain that brand positioning and maintain that moat within the grocery store context. And I bring Campbell Soup up, because — I think Cars.com is trying to run a very similar game with its business model. It invests a lot in advertising. It has these larger than I would expect gross margins. It relies on this kind of top of mind status and probably the reason that I thought this is because you mentioned sort of a lever of search, search leverages to search for companies like CarGurus, and Cars.com has an advantage, because its website name is Cars.com, and you can just type in that URL. Maybe that’s a flimsy advantage. But I think it gets into this concept of where might there be a moat here.
The story of Campbell’s is kind of — well, now with Instagram, social media, YouTube, and all these other things, they’re all these other awareness channels that Campbell’s can’t control. And no matter how much it spends, it can’t prevent new entrants onto these different digital platforms. So whatever, meathead brand, protein max soup startup comes along, is going to give Campbell a much harder time.
People can buy that stuff online. And so it’s just a shifting market dynamic. And I wonder whether the key question, I think, for Cars.com in terms of sustaining growth and sustaining nice profit margins is whether new entrants on the digital realm of this car purchase decision environment, whether it can ward them off. And I think the strength of BOOX is — thesis is, and just the intuitive answer is, we shouldn’t expect Cars.com to sort of maintain great share when, how hard could it be to start similar website and just sort of eat into it? And there are a lot of names in the space already.
DS: Yeah, I do think that Cars.com is — there is value that I think a lot of people don’t even type in the full URL. They just type cars into their search client or their browser, whatever. And Cars.com will show up quickly. So it sounds silly, but I — that’s the world we live in. That’s how people find information. And I think and I would think that your car buying is more of a browser search environment than it is a social media sort of flipping through sort of thing, at least when it comes to making the buy. So that I buy?
MT: Yeah. I’m trying to think of what that would look like, like an Instagram car influencer.
DS: I would — I assume they’re out there. And I would assume that the way it looks is just that they get you excited about the car. And maybe they’re trying to funnel you to somebody, but also you’re going to probably just go and look where can I buy this cool car in my area or whatever. And then you’re going to — and that’s where Cars.com or competitors can kind of, well, I think they’re more focused on used cars. So that also plays a role there.
MT: I just Googled 10 most powerful social media influencers in the auto world. But it led me to a website that doesn’t seem to have article. So whatever — whoever those people are, they’re out there. And they’re probably super rad.
DS: What’s up guys? Just got back from driving my 1500 2019 Rand and it is spacious. Little pricey, but you know, that’s what you got to do, if you want to crush it through the moat sites.
MT: I don’t know what — it’s probably something like that.
DS: Fantastic.
MT: Like a handsome dude with sunglasses and spiky hair.
DS: I was thinking blow dried hair.
MT: Blow dried what?
DS: Blow dried hair. But your…
MT: Blow dried hair, cowboy. I can see like an authentic cowboy doing really well in the sort of heavier vehicle.
DS: So it’s possible — So it’s cowboy car influencer. Yeah.
MT: Yeah. Hey, y’all. It’s Chuck here with another truck review. It’s probably pretty good.
DS: Well, so it’s — so Cars has that advantage. They also have their big — I think it was in the article — it was either in the article or one of their slideshows Cars.com showing up on the side of a hockey rink, the boards at the hockey ice rink. And they talk about sponsoring the Stanley Cup Playoffs, PGA Championships, March Madness, like they’re definitely sort of like our old friend, Papa John’s, they are definitely trying to advertise and that historically.
MT: Old friend, old person we know about, Papa John’s.
DS: Right. So this guy like no actual relationship with the pizza chain beyond…
MT: We don’t hang out. Yeah. Hang out with Mr. Schnatter. No. Yeah. So All right. So there’s the Campbell’s game going on. And that’s probably I think the key issue here with Cars.com is whether it has a moat. And I think so we talked a little bit about the things it does to maintain awareness. We talked about a little bit of a vulnerability. I think another step — I mean, the acquisition and this Autocorrect initiative that Cars.com has started, which is a nice pun. We both agreed before the show.
DS: Good work there.
MT: Autocorrects, whoever it, yeah, give that person a promotion. That — the data driven thing I could see as being a moat because while it may be easy to set up a website that lists and links to dealerships, we are not on the ad sales side of Seeking Alpha. But we do know from our experience within the financial news industry that ad buyers and customers who are looking to reach audiences are always looking for sophisticated analytics to help convince them and let them measure the efficacy of their campaigns or their presence on different websites.
And that is not easy to construct. I think all media companies do struggle with this question of well, did we drive a conversion or what really happened with the user. And so I would be incrementally bullish on the acquisition and on Cars.com’s business model to the extent that, it’s effective in sort of solving that pain point, which is a big pain point, a known pain point for basically any sort of attention-driven media-based business model.
DS: Well, and it’s also — you say that the Q3 is when they’re expecting to see — and they call it sequential dealer growth. That’s when they sort of expect to get rolling again. And I think that’s where the one of the other topics which we talked about a lot, but it’s also where are we as far as cyclical auto sales? What are we expecting there? And I think that looms, I remember thinking about that when, at the Kerrisdale presentation on CarGurus. I think one of us may have even asked about that at the conference. But the — you would think that the incremental any headwinds in the auto industry which either cyclical or macro in the sense of it could just be that we’re at the end of the cycle.
I think I didn’t pull up the chart before this call, but I think we were talking about how the standard auto vehicles chart is more or less flat over the last three or four years, which is kind of weird. But so the question is, are we sort of is — that a risk here that might lead to declining auto sales? Auto sales, I think are down a little bit this year so far. And is — or is there a chance that this is sort of a soft landing, and then it kind of turns around into a more positive run sooner than we think, because there’s still slack in the economy or whatever else.
But that also with all the other stuff, and I think it’s come up — we talked about Lyft (LYFT). At some point we talked about GM (GM) last year, just all the headwinds in the auto industry as a changing industry to where used cars as sort of a secondary player there like, how valuable will used car be five to ten years from now, if you are at an advent of increased autonomous technologies or increased electrification or whatever other major changes in the industry. It would seem like that would be something, presumably people are still going to be changing the assets they own in their house.
They’re still going to be trading cars and out but it’s still something I would think about as both short term and long term for Cars.com. How does that — how are they positioned for a world where the car may — the way that car functions in our day to day life may change?
MT: Yeah. Whenever we run out, I mean, I’ve become probably increasingly difficult for you to talk to about these things over time. Because I…
DS: You’re never difficult Mike, never difficult.
MT: Oh, thanks.So easy, yeah, so easy to interact with me. That’s what all my feedback says, an employee and as a husband and as a friend. We keep written feedback of quarterly performance reviews, in all my relationships from corporate all the way through to my dog, Boo and everything in between.
DS: And data-driven. Yeah.
MT: Data-driven KPIs. Yeah, all over the place. Where was I at? So yeah, so I’m difficult to work with in this one particular area, which is talking about the cycle and the potential of it turning and the reason is because we thought that there were — there was a sort of dip in 2016 in the shale boom, kind of having the air led out of it and all that stuff. And we had a little bit of a mini-dip in the economy. We had another scare in December where the stock market started to go down.
The yield curve has inverted and is getting, increasingly sort of inverted. Those are all warning signs that may or may not result in a change in the economy and the economic tide. And so I’m going to reiterate that we don’t know and we can’t plan. And then I’m going to add something this time that may make our conversation less difficult the next time which is two legs to this. One is you can’t live your life in fear. You have to — like you can’t just be looking for the next recession all the time.
But two, this should be part of your evaluation process. And you should take this in and adjust your — the multiple you’re willing to pay, adjust the discount rate you assign based on cyclicality, I think. So my answer is it matters to the business analysis, but there’s a way to kind of just factor it in, and how attractive you think the stock is relative to its fundamentals? Is that fair? Is that fair, Daniel?
DS: Yeah, it’s fair. Let me ask you then, earlier we were talking about you would pose the idea that maybe we’re just at an equilibrium and maybe these competitors are just kind of taking share off each other, and it’ll balance out over time. And you’ve actually and we’ll get into it a little bit, but you’ve actually looked at Cars.com closer in the past.
And what — my question is this, okay, let’s say we can — TAM is presumably, all dealer transactions have used cars, maybe even new cars sold off a dealership whatever else. And that will be whatever it will be. Does that — what was my question going to be? Given that sort of static nature of whatever that high level thing is, how do you — you said you can factor it into your valuation, but how do you factor it in here, given where we — what we talked about earlier with Cars’ competitive position and how they seemed to be doing?
Like, I’m not asking you for your valuation on the spot, but how would you balance these trying to figure out? Because I guess what I’m what I think investors need to ask is, you’ve posed management’s case for why this is a temporary slowdown. So you have to say, okay, is this temporary? Or is this more long term? Is this caused by competition, our own execution, which we can fix, or the macro climate. And then like, so sitting as a pundit, as a podcast host a third party analyst, like how do you — how are you sorting through those things, those different elements of where this thesis might be? Where this — we’re looking at a short case for a company that’s near its 52 week close, and all-time low since its spin-off. So how are you — how would you balance those things?
MT: Well, you didn’t ask me for an evaluation on the spot, but maybe I can just give one. It’s currently at a forward PE of 12 at a share price of $21.50, about. Shot that down to forward PE of 10. And then maybe it’s worth looking at. So whatever that is in terms of the share price. So 16% lower than where we are now.
I think that this — this is where I think the rubber meets the road and you start to look at your soul and who you are as an investor. And by the way, you’ve — this was you making my life difficult, Daniel, so thank you for that.
DS: Sorry.
MT: But I think look — I mean, I got when I did my first when Cars.com spun off a couple years ago, I did — I wrote a valuation piece for seekingalpha.com, which is now in the archive behind our Seeking Alpha Essential subscriber paywall, but for Seeking Alpha Essential Subscribers, you can look at it yourself and derive all the tremendous value that — and insight that’s in there. I just — but I got made fun of in the comments for saying I think that this deserves a PE of 10.
And I think one of the beauties of investing is that I just get to make that decision for myself. That that’s the multiple I think is appropriate. And I don’t — I think it’s good if you kind of account systematically for things like the industry trends and the business structure, the cyclical versus secular dynamics.
You can — if you want weigh all those things in a kind of table and then say okay, the I score it on this, on industry dynamics this on the cycle, and this. And then I weigh each of those things, and that gives me some sort of output for how I want to think about the valuation. I didn’t do that, but I think that subconsciously, internally, that’s kind of the 10 PE is a function of looking all that stuff and saying, okay, that’s a — that’s where I think you can start where the risk starts to be worth it on valuation.
And so that’s a potentially unsatisfying answer and maybe a frustrating answer for our listeners who demand that we know exhaustively every single detail. And respect to all of you for doing such diligent work of your own. But I also think that that’s part of the beauty you just have to get — you have to get what’s important right in investing. And the stock either goes up or down. And that’s kind of the beauty is you — your thought process just has to be right on the most important things.
And so when I look at stuff like this personally, I try to be conservative on valuation. And I try to mentally adjust where I think something should be and to take company specific risk, I demand a high earnings yield of 10%. Otherwise, I don’t bother. And so that’s my thought process on something like this.
I’d have to really look at the stuff more carefully to make a similar call at this point, but I think Cars.com is more or less the same business with the same strategy that it was when I first looked. I have long thought that it was too expensive and got made fun of for that at the time and it may never reach a price that’s attractive for me, but that’s okay.
Like Mike Boyd said, you just wait. And if it comes around, then it comes around, but otherwise, just let it sit, but stay true to yourself.
So I don’t feel like I have to be accountable to the outside world on that particular choice, because I think it’s a choice that each investor gets to make. And you should be able to explain the basis for it when you’re sharing analysis. But ultimately, it’s in the world of different people will have different opinions. I think that’s where we cross from looking at what’s right and what’s not into looking at what your individual risk tolerance is and what your just general approach to the stock market is and that’s mine. I slap a 10 PE on earnings. And that’s to me a meaningful way of going about it for better, right or wrong. That’s kind of my initial take.
DS: Well, I want to want to — one of the things you wrote in your conclusion that I think this is written, again, when the company first sort of spun off almost exactly two years ago. It’s a little bit more than two years. You wrote that — you wrote about their balance sheet issues and the fact that they would be taking on a term loan to give money back to Tegna, their parent. But you had — you said, with a per share strike price of $12 executive compensation plan set something of a floor above a conservative margin of safety value of $9 to $10. I worry about being too much of a valuation hipster and missing an opportunity. Investors of lot of companies that advertise on TV and catchy ticker symbols are sometimes enough to send a stock on its — stocks on a tear.
And what I like about that is you also — you actually sort of nailed that, you said the stock may trade anywhere from $15 to $30, which I think when we look at that before it happens that sounds a little bit like all right, come on, dude, you’ve just given us like the stock might double or might get cut in half, like what sort of a range is that?
But then when you read, we talk all the time about Joel Greenblatt, or other investing books and you read and they’ll just say — they’ll throw in $21 and 1/4 or whatever. But though they just talk about the stocks moving up and down, and they do move up and down that much, that happens. I mean, it has happened in the last six months, or nine months, when you go back from Q4 last year to where we are now, like stocks do move up and down quite a lot. And we have a tendency to sort of not see that coming, and go away.
And so I think you had a good framework for it. And you did get some crap from commenters about how you would never get a chance to buy. And now, at this stage, it doesn’t look like it’s all that worth buying.
I guess the question I want to ask as a long build up, and we can maybe cinch it up here is we’ve talked about Cars.com. And this is where we go back to the short case, which I find short cases that kind of pick out the straggling gazelle and the herd that is falling back. And that is already showing signs of where or to use another metaphor, the axles are starting to fall off. Like, I find those sorts of short ideas to be really compelling, because I think there’s a lot of intuition to that. That’s how organizations often work is that they kind of don’t hold together once things really start to go awry.
The question here is, you put a very conservative multiple. And as we look at Cars.com right now we’re talking about, excuse me relatively competitive space or quite competitive space. I don’t think you weren’t — you didn’t mention CarGurus or Carvana two years ago, not that you should have but just as an example of a newer competitors coming in. And they’re forecasting slowing revenue growth at the minimum this year.
They’re — they’ve made a they’ve spent a lot of their cash on, I think was $157 million acquisition of this Dealer Inspire, which could develop a moat, but it’s also somewhat speculative. I think proofs in the pudding, whether that plays out. They have some legacy sort of old school, Campbell’s Soup type of moats, but they don’t really. It’s still not obvious that the logo sort of looks older fashioned. It’s not obvious to me that that’s where I should go to deal with trying to find a car.
So I guess the question is, even if it were at a 10 PE, at some point, this is the deep value versus value trap argument, I guess. At some point when you get that low like not that the price is telling you that something wrong but presumably if the price gets there, it’s because the business is struggling. What do you like — is it worth it even then? What I mean like — and that’s the argument in that you’ll see quite a lot on FinTwit or wherever else is that, value investing this day and age can’t just be about multiples, because the stocks that traded at such bad multiples are — or such attractive multiples tend to be bad companies. And so I’m just curious how you think about that with the perspective that you have from being relatively vindicated over Cars.com?
MT: Thanks, Daniel. One way to be vindicated in your analysis is to make — to call for such an extreme range in price fluctuations because the wider you get, the easier it is to be right. And I was wide so I was right. To the question, I think. I think that’s where — when I said 10 as a PE, I think I was referring to the kinds of things that are harder for us to look at and forecast. And those are macro dynamics and to some extent, dynamics within industry. So whether the auto cycle turns and whether Cars.com sort of has — loses market share is unable to maintain it, is unable to grow it, experiences continued revenue declines.
I think that that’s a separate consideration. And that’s one starting point for the kind of 10 PE. I wrote the 10 PE there under the circumstances of the initial article. I think things are largely the same but slightly worse. So that would be — I would be making adjustments based on further due diligence on these dynamics.
I’m not comforted by the Campbell Soup model, the more we talk about it. I do think that there’s room for entrance here. And I applaud BOOX research, both for taking this total addressable market TAM approach, which is one that doesn’t occur to me as I’m doing my own research that well, but I think is an really effective way of considering how mature a businesses and how much more upside is left.
And I think the most damning element of this research is it’s really hard to picture where additional growth is going to come from. On top of that, I basically believe the FinTwit line, you can look at a lot of sort of more quantitative-based research that shows that alpha on the long side of stock investments, especially in the U.S. is basically been compressed to ridiculously low levels and where there still is some alpha to generate is on the short side. And I think that the value factor has underperformed for a long time. And one of the reasons for that is I think that the market has probably just become much more efficient in identifying undervalued companies that are solid.
I think that we’ve gotten better at that, especially in spaces where the business is easier to understand than a media company would qualify. So I think that leads me to generally avoid, I think what you would need to be excited about the opportunity would be a more tangible rationale for why there’s a disconnect to intrinsic value. The reason I looked at Cars.com at the beginning was because of the spin off dynamics. And that you whether it’s so true today, as it was when Greenblatt wrote, you can be a stock market genius. The rationale there is that, there’s forced selling because shareholders don’t want to spin off, there’s not index inclusion. So one commenter on my article mentioned the S&P 500 Index, as a potential catalyst to drive some price increases for Cars.com.
I don’t see that now. I think the default is that the pricing is efficient. And I think BOOX did a good job of capping the upside. And so I don’t know, you’d have to adjust the PE lower than that. And my unfortunate conclusion right now is this is like, a stay away. And it kind of does feel like a short. I’ve just been trying throughout our conversation to put in some additional — put some additional meat on the bone in terms of the context and what management’s trying to do, but I’m not bullish on stock, even at a 10 PE, probably.
DS: Yeah, it will be interesting to hear more. I think that’s what was missing from the article. And what is missing thus from our discussion is not your article, the BOOX research article, is the analysis of the competitors from more of a more of a unit level is not the right term, but from the ground like what actually makes it different. The different companies what — why is CarGuru’s doing better, what are they actually executing on that allows them to grow revenue, for example?
And then also to hear what is this — get a better understanding of does this make sense what Cars.com is trying to do? Are they actually — because they — we’ve seen there are examples of business transformations where somebody makes a bet on a new approach or whatever else and so maybe this auto corrected or something else is going to drive new growth and even if they even if they hit a cycle, the fact that they start to gain share internally, they don’t have a terrible balance sheet. They still have a lot of that term loan but they also generate a good amount of free cash flow, so they’re even buying back shares.
So yeah, that would be, I think those are the two blind spots we have right now, our more understanding on how Cars.com is trying to act within this and how — what actually differentiates them from their competitors. But yeah, I agree that on the face this is a very clear cut and compellingly made short thesis that doesn’t spend a lot of time on evaluation but just sort of makes you feel like this is a company that you’re not going to get a lot of value out of as a shareholder. And so tip of the hat to that.
MT: Yeah, melting ice cube, felt like a melting ice cube.
DS: Yeah, that’s it.
MT: Gosh, don’t like that.
DS: Especially not in the summer. The ice cubes, they melt too fast.
MT: Yeah, bummer. We hit our low energy point. I think it’s time to close it. I should have made much more hay out of you giving me any props for my analysis, but we got to stay humble here at Behind the Idea. That’s really important.
DS: Just keep our head down, keep grinding.
MT: Amid all the praise we got from commenters and all that effusive reviews we got, we got to — it’s up to us to keep our egos in check. So that’s what I was doing there. Next time I’ll probably do a little bit more of a victory lap.
Cars.com. Go to go to the website — check out the checkout the 1500 RAM here I’m back in my influencer. Check out the 1500, looks great. Van, great interior entertainment system. I was looking at it, it is very expensive. But it would be cool to have a giant truck. You got to go.
DS: We got to go.
MT: Yeah, that does it.Mike, dreamingabout his trucks. Okay. See you Daniel.
DS: Bye.
MT: Bye.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Neither Mike nor I have any positions in any stocks mentioned. Nothing on this podcast should be taken as investment advice.
