Cars.com (CARS) is a leading online automotive marketplace. We have utilized the website as both a consumer and as investors in this company. You may recall that Cars.com is a Tegna (TGNA) spinoff. Tegna, whose main business operations are in TV stations and selling advertising, spun off Cars.com back in June 2017.

The spinoff was met with mixed reviews and it was widely believed that the valuation was too high on the company. Well, we initiated a small position in the company at $21 in the fall, and since then the stock has moved higher:

Source: Yahoo finance

But can this momentum continue? In this column we discuss the performance of the name in the most recent quarter, as well as for all of 2017, to get an idea of how the company is trending. Further, we offer our thoughts and projections for 2018 performance.

Not the best Q4

The top line revenues in Q4 2017 were $156.6 million compared to $161.7 million in the prior year period. What is going on here? Well, this reflects softness in the national advertising business, which declined 7% compared as well as advertisers’ shifting spend to programmatic away from interval scheduling.

What is more, not only were revenues down, but operating expenses for Q4 2017 were up to $117.7 million compared to $112.8 million for the prior year period. This increase was driven by a $3.8 million increase in general and administrative expenses, reflecting $2.7 million of incremental public company costs, $0.7 million of non-recurring costs, $0.4 million of write-off of assets and $1.1 million of stock-based compensation expense.

Combining the top line and factoring in expenses, as well as a tax reform benefit, we see that net income was $151.8 million compared to $48.8 million in the fourth quarter of 2016. However, much of this included a big tax benefit of $131.0 million. Factoring in necessary items, adjusted net income was $34.2 million compared to $68.0 million for the prior year period.

Customer metrics  end 2017 soft, improving to start 2018

Cars.com continues to be focused on gaining greater share of consumer audience. Average monthly unique visitor count grew 1% in 2017. Although total traffic (visits) declined 3% year-over-year, total traffic (visits) has grown mid-single digits in January and February 2018.

Cars.com is growing in the mobile leadership space, reporting 6% growth in mobile traffic year-over-year. Mobile traffic represented 59% of total traffic in 2017 compared to 54% in the prior year. Mobile app traffic in 2017 was 24% of total traffic for the year compared to 22% in 2016.

Dealer customers were 21,296 at the end of 2017, which was essentially flat compared to 21,307 at the end of the third quarter of 2017. Direct dealer customers of 14,356 were up 3% compared to the third quarter's direct dealer customers of 13,963.

2017 financials

Revenue for 2017 was $626.3 million compared to $633.1 million in 2016 primarily attributable to a 4% decline in wholesale revenues partially offset by slight growth in retail revenues. As for expenses, they were $492.0 million compared to $456.5 million for the prior year. This led to net income for 2017 of $224.4 million, which includes a tax benefit of $131.0 million. On an adjusted net income basis, 2017 earnings were $165.7 million compared to $250.6 million in the prior year period.

Looking ahead to 2018

We are a bit nervous about holding this stock despite how small the position is. Cars.com expects to achieve approximately 10% to 11% revenue growth in 2018, consisting of approximately 3% to 4% revenue growth from its organic business. We are looking for traffic to increase mid-single digits but would like to see a better plan for managing operating expenses. We think operating expenses are set to rise mid-single digits once again, which could pressure earnings. For 2018, we anticipate flat to low single-digit growth. As such, we rate the stock a hold at present levels.