Carsales changes drivers

Normally we don't place too much emphasis on senior management changes, especially at high-quality businesses. That remains the case at Carsales.com, which we continue to think is the sort of business you should have in your portfolio. We recommended the stock most recently in November in Carsales' core business motoring (Buy – $9.93) although, with the price up 11% since then, we've returned it to Hold.

And yet, today's announcement of the departure of managing director Greg Roebuck in March is still cause for comment. Roebuck co-founded Carsales in 1997 (although his 4.9m shares in the company is a relatively small 2% stake). He's been managing director since 2002 so his retirement is definitely a loss to the company.

If we were suspicious – and as an analyst it pays to be – we'd think the timing curious. While Carsales' core business is indeed motoring, it's unlikely to be the strong growth company it once was. Even this year we suspect consensus 2017 earnings per share forecasts of 50-odd cents are too high.

As mentioned in Carsales' Stratton splutters, we have another couple of niggles. Sites like Gumtree are more of a threat for Carsales than for other online classifieds businesses. A cyclical downturn – Carsales sells advertising, after all – is also possible at some point.

The company has already announced it will write down its investment in iCar Asia by about $7m, although we suspect Stratton has been more damaged by the ASIC investigation into a lender on its panel than the company has yet admitted. Stratton could be the next writedown.

Tears after fears?

None of these are new fears – we've been talking about them for months now. And, to be completely clear, they are fears – perhaps we're being unduly pessimistic. Carsales is an excellent business and still deserves a place in most portfolios (at the right price, and depending on your other exposure to advertising-related businesses, of course).

But Roebuck's departure must be considered a red flag. While he will be retained by the company as a consultant, he won't join the board (many consider former chief executives immediately becoming directors a corporate governance no-no, although not necessarily us). He will be completely free to sell some or all of his shares if he foresees problems on the horizon.

On the bright side, Cameron McIntyre looks like a good choice to take over. He joined the company as chief financial officer in 2007 and became chief operating officer in 2014. McIntyre announced on the conference call that the strategy was unlikely to change significantly so it should be a smooth transition. McIntyre's appointment should help maintain Carsales' culture.

Never certain

Of course, if you were worried about every corporate change or problem, you'd never buy any stock (and you'd certainly never find a bargain). There's always a reason to worry and shareholders never have complete information.

We can, however, flag that the risks of bad news for Carsales over the next 18 months have probably risen. It will be interesting to see McIntyre's attitude to shareholder communication; it wasn't really a strong point of Roebuck's, but then again the company's strong record spoke for itself. Roebuck isn't leaving until March, so the 8 February interim results will be his to present.

The market obviously shares some of our concerns, with the stock falling 2% today in a stronger market. We suggest you stick strictly to our 6% suggested maximum portfolio weighting but the stock remains a HOLD.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Carsales. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.