Why UBS thinks you should cash out on Carsales.com Ltd after its 30% surge

Carsales.com (ASX: CAR) is one of the best performing stocks on the S&P/ASX 200 Index but the stock may have hit a peak and this may be a good time to take profits.

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The share price of Carsales.com Ltd (ASX: CAR) is quickly backing away from last Friday's record high of $15.22 with the stock reversing another 3.1% yesterday to $14.68.

If UBS is right, the stock has lots more room to drop before it can find its feet following Carsales.com's impressive 30% run up in its share price since the start of the calendar year.

It isn't the best performer among the original "dot com" classifieds trio, which includes property website operator REA Group Limited (ASX: REA) and jobs listing site owner SEEK Limited (ASX: SEK), but shareholders will have little reason to complain.

REA Group is up close to 40% while SEEK is ahead by 25%. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is sitting on a gain of around 7%.

But Carsales.com may have hit a peak – at least for now – as UBS has downgraded the stock to "sell" from "neutral" as the broker believes the stock has raced too far ahead of valuation even as management has announced across the board price increases for car dealers.

I suspect car dealers won't be happy but UBS believes this will underpin growth for the company in FY18.

Carsales.com has upped its fees for leads and for advertising on its site by a few dollars. For instance, phone or email leads for second hand cars priced under $3,999 used to be free but will now cost the dealer $3, while leads for used cars priced over $9,500 will cost $3 more at $48.

The cost to list automobiles on the site has also gone up with larger dealerships feeling most of the pain as Carsales.com has created more tiers (based on the cost of the new car), which could see this group pay up to $20 more.

But if Carsales.com (which remains the undisputed top auto website in Australia) can shorten the sales cycle for dealers, it would justify the price increase as UBS estimates it costs dealers around $40 to $60 a day to hold a car on average.

It's hard not to like Carsales.com for its market position, enviable track record and capable management team, but as they say, everything has got a price.

UBS thinks the growth expectations by the market is too optimistic and it is urging investors to take profit now.

"Assuming a conservative equity return hurdle for CAR of c9%, we think current share prices implicitly factor a c13-14% EPS growth CAGR FY18-23 (vs. UBSe c9%)," said the broker.

However, better than expected performance from its Korean operations could justify the current share price, although it may be too early to be making that bet.

Looking for other better priced "tech disruptors"? Click on the free link below to see what the experts at the Motley Fool have uncovered.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited. 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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