Given the quality of the company, and its historical financial performance, many investors (like you) might be asking the question, “Is this a buying opportunity?”
With compound earnings growth of 38% over the last five years and a massive 51% over the past decade, there’s no doubting the owner of realestate.com.au’s historical ability to generate high earnings growth.
The problem is that despite the price fall, REA Group is still trading on an historical P/E ratio of 49 times earnings, and although earnings per share are expected to increase over the next two years, consensus earnings of 114.9 cents in 2014 and 152.1 cents in 2015 place the shares on prospective P/E ratios of 42.4 and 32 times respectively.
Analysts expect the company to grow 38% in the 2014 financial year and 32% in 2015. If the property bull market continues, then there’s every reason to expect REA Group to deliver. So far the company has delivered, with earnings rising 37% for the latest half year.
With a virtual monopoly in Australia, the potential to grow market share seems limited. The company could grow earnings instead by raising prices for existing products and services. That of course could backfire and give Fairfax Media Limited’s (ASX: FXJ) Domain an opening to steal market share from REA.
It could also tack on and charge for additional services. It’s also one of the reasons why Onthehouse Holdings Ltd (ASX: OTH) has often been suggested as a potential takeover target by REA.
The company’s international divisions hold the number one spots in Italy, Luxembourg and Hong Kong, but currently contribute little to the group’s earnings. While there is the potential for massive growth in these countries, it may take some time before they become significant.
iProperty Group Ltd (ASX: IPP), which holds the number one or two real estate websites in a number of Asian countries including Malaysia, Indonesia, Hong Kong and Singapore could also be a potential takeover target, should REA Group look to generate higher growth.
REA Group is being priced as if nothing could or will go wrong and that can be dangerous. Even a small miss in expectations could see the share price fall dramatically, offering a much better price for Foolish investors prepared to be patient.
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The above article was written by Mike King for The Motley Fool, and can be read in its entirety by clicking here.