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4 reasons to sell Carsales.Com Ltd shares right now

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Shares in online marketplace Carsales.Com Ltd (ASX: CAR) are up more than 30% this year. For a variety of reasons, I recommend taking profits

Firstly, although Carsales focused on 13% growth in revenue at its last results, that excludes Finance and Related Services.

In my view, it’s one thing to exclude discontinued operations, but quite another to downplay continuing business just because it happens to have done badly! Add them back, and net profit after tax was actually flat at $109m.

That leads onto a second issue that bothers me, namely that $9.2m of labour costs associated with technology development have been capitalised. That’s up 11% on the previous year too. I would prefer to see costs such as these expensed, especially as they are likely to be recurring.

Thirdly, there is a long way to go for the group’s international operations, primarily in Latin America, to turn a meaningful profit. In fact, international recorded a small loss in the year. In addition Carsales took a $7.1m write down on its investment in ICar Asia.

Finally, I come to forecasts for the year to June 2018. Analysts are expecting 11% growth to 54c-55c earnings per share.

But that’s surely influenced by the “adjusted” earnings from last year of 49.4c, whereas the net earnings were only 45.4c. I think it’s going to be a tall order for Carsales to get from 45c to 54c on an outlook that the company described at its AGM as merely “solid”.

Foolish takeway

On my numbers, Carsales trades on a multiple of 29x. That seems very full to me for a business whose growth in its core Australian market is only a fraction of that.

Carsales is still a great business, but I would be inclined to take profits after such a good run. I have expressed similar sentiments about the real estate online portal REA Group Limited (ASX: REA).

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Motley Fool contributor James Middleweek has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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