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CarGurus Stock Is Believed To Be Significantly Undervalued

- By GF Value

The stock of CarGurus (NAS:CARG, 30-year Financials) appears to be significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $23.71 per share and the market cap of $2.8 billion, CarGurus stock is estimated to be significantly undervalued. GF Value for CarGurus is shown in the chart below.


CarGurus Stock Is Believed To Be Significantly Undervalued
CarGurus Stock Is Believed To Be Significantly Undervalued

Because CarGurus is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which is estimated to grow 15.29% annually over the next three to five years.

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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. CarGurus has a cash-to-debt ratio of 4.15, which which ranks in the middle range of the companies in Interactive Media industry. The overall financial strength of CarGurus is 6 out of 10, which indicates that the financial strength of CarGurus is fair. This is the debt and cash of CarGurus over the past years:

CarGurus Stock Is Believed To Be Significantly Undervalued
CarGurus Stock Is Believed To Be Significantly Undervalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. CarGurus has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $551.5 million and earnings of $0.68 a share. Its operating margin is 17.73%, which ranks better than 74% of the companies in Interactive Media industry. Overall, the profitability of CarGurus is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of CarGurus over the past years:

CarGurus Stock Is Believed To Be Significantly Undervalued
CarGurus Stock Is Believed To Be Significantly Undervalued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. CarGurus's 3-year average revenue growth rate is worse than 67% of the companies in Interactive Media industry. CarGurus's 3-year average EBITDA growth rate is 45%, which ranks better than 78% of the companies in Interactive Media industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, CarGurus's return on invested capital is 36.59, and its cost of capital is 13.86. The historical ROIC vs WACC comparison of CarGurus is shown below:

CarGurus Stock Is Believed To Be Significantly Undervalued
CarGurus Stock Is Believed To Be Significantly Undervalued

In conclusion, The stock of CarGurus (NAS:CARG, 30-year Financials) appears to be significantly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 78% of the companies in Interactive Media industry. To learn more about CarGurus stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.