The REA Group Limited (ASX: REA) share price has seen a high of $65 and a low of $47.50 over the last 12 months. Today's price of $57.02 is an interesting price to consider, is it worth a buy?
REA Group is the owner of realestate.com.au, Australia's largest property website. It also has stakes in leading websites in South East Asia, Europe and North America. It has grown its market capitalisation to $7.5 billion.
The share price could easily move either way due to a number of factors:
The bull case
REA Group has a strong position as the market leader in Australia. Property sellers and potential buyers will always want to make sure they're on the largest property portal. This gives REA Group the ability to increase prices at a strong rate and not suffer a loss of activity.
Real estate agents take up a large portion of a vendor's advertising budget. Agents are important to the process, but it's even more important that vendors have a good online presence because that's where potential buyers do their research. Over the coming years it's easy to imagine REA Group could take more revenue for its 'premium' advertising options.
REA Group's overseas sites have great potential to generate strong returns. The American site has the power of News Corp (ASX: NWS) behind it to boost traffic. The Asian part of the business has long tailwinds as the population uses more digital services.
Management have grown the business well. It has low debt and a good cash position, plus it only paid out 43.2% of its continuing earnings as a dividend in its half-year to 31st December 2016.
The growth over recent years has led to the dividend per share growing from $0.10 in March 2011 to $0.40 in March 2017. It won't grow as fast over the next six years, but it should still achieve strong growth from here.
The bear case
REA Group generates most of its revenue from vendors advertising their property. If a property crisis were to occur, it's fairly safe to assume that sentiment about REA Group would turn negative, even if it were to continue generating good revenue.
There is a reasonable argument that vendors would have to work harder to sell their property, which would mean increased usage of more expensive advertising options. However, in a falling property market I'm not sure how many property owners would want to sell in those conditions, leading to a fall in the number of listings.
Time to buy?
REA Group is trading at 33.2x FY17's estimated earnings with a grossed-up dividend yield of 2.14%. In the long-term I think REA Group's share price will grow very nicely, however any Australian property market wobbles could hurt REA Group in the short-term.
I'm not buying at the current prices, but I'd be very interested if it dropped below $50 again. Instead, I'd put my capital into these three fast-growing businesses which are trading at attractive value.
