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Would you buy Carsales.com?

At first glance it was hard to see why Carsales.com (ASX: CRZ) was hit so hard by the federal government’s announcement of a review of FBT (fringe benefit tax) concessions on company cars in salary packages. Opening Wednesday at $9.60, it closed at $9.32 in a flat market, with even an intraday low of $9.10.

You wouldn’t think even a major decline in new car sales from smaller fleet purchases would make that much difference to a company that relies primarily on online sales of mostly used vehicles. After all, it has nearly a quarter of a million of cars for sale on its website. How much impact could this one decision have?

Perhaps the thinking was that if there were less fleet sales, there’d be a trickle-down effect of fewer good quality used cars going into the market. Maybe it was an expression of concern over the overall state of our nation’s vehicle industry, already hit by Ford’s decision to withdraw from manufacturing and banter about what level of manufacturing is domestically sustainable. Not many of the FBT concession company cars are made here anyway.

Or perhaps investors are getting jittery about whether Carsales.com is starting to be overvalued and are looking for an excuse to bring it back to the field. Morningstar puts its intrinsic value at just $7.20 and has a reduce recommendation on it.

Certainly the company is mature and dominant in its market niche and is looking for ways it can continue to grow. It recently signed a binding agreement to acquire 30% of Brazil’s leading motoring website WebMotors for about $89 million. In March it bought 19.9% of iCar Asia, which operates in Indonesia, Malaysia and Thailand, for $13.4 million. More importantly, its chief information officer Ajay Bhatia was reported to have said it was considering offering its technology platform to other companies as it sought to build stakes in overseas markets.

Carsales.com reported NPAT up 14% to $37.57 million for the half-year to last December. Revenue was 17% above the same period last year. The stock price quickly came off its late May peak of $10.54, but started steadily rebuilding to hit $10 a little more than a week ago. It was trending down again before Wednesday’s fall and opened Thursday at $9.31.

Foolish takeaway

The top automotive accessory in Brazil might be a bulletproof window, but Carsales.com is not a bulletproof stock. Investors wanting to hitch a ride to its growth story need to do so with caution.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned. 

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