This morning online property advertising business REA Group Limited (ASX: REA) posted another strong quarter of double-digit profit growth as it continues to demonstrate the benefits of its cost-light business model.
For the quarter ending March 31 2017 the operator of the realestate.com.au website grew to $86 million on revenues of $156 million. The EBITDA and revenues up 20% and 16% respectively over the prior corresponding quarter.
This strong result was achieved despite what the group's impressive chief executive, Tracey Fellows, claimed was a market of lower property listing volumes and "soft conditions" in its key Asian markets of Malaysia and Hong Kong.
For investors the most notable aspect of the result is that profit growth continues to heavily outpace revenue growth, despite the business investing in new products and advertising to maintain its market-leading position.
Companies that are able to consistently grow profits faster than revenues should be at the top of all investors' shopping lists, as their operating leverage usually means they are capital light (REA Group is a collection of websites) and can lift revenues without taking on too much in the way of additional costs.
For example REA Group hardly needs to hire more staff to advertise more revenue-earning properties, whereas businesses like miner BHP Billiton Limited (ASX: BHP) or airline Qantas Airways Limited (ASX: QAN) would generally have to take on far higher costs or capital investments to grow revenues anywhere near like REA Group rates.
Thanks to its capital-light and super profitable business model REA Group's return on shareholder equity (ROE) has historically hovered around 35%, with consistent double-digit profit growth rates to add ballast to the investment case. Moreover, it's leveraged to probably Australia's most potent asset class in property and operates as the dominant player in a sector with only one real competitor in Fairfax Media Limited's (ASX: FXJ) domain.com website.
While Domain enjoys the online reach of Fairfax's leading mastheads such as the SMH, REA Group's websites enjoy the online reach and cross-selling support of News Corp's (ASX: NWS) globally powerful digital and broadcast news distribution organisations.
I've used this article's headline on REA Group before and continue to believe that it may be the best growth stock on the ASX, with shares up 350% over the past five years alone.
Why wouldn't you own shares in REA Group then?
Aside from missing a trick, the only reason I can see is valuation. After all overpaying for fast-growing businesses is one of the commonest mistakes inexperienced investors make. Today the shares sell for $64.84, which is around 35x annualised earnings per share of $1.85 when adjusted to exclude non-recurring items such as discontinued operations via asset sales.
REA Group is a great business, but I would prefer a price at least 10% cheaper before buying shares and expect I may get it between now and August 2017.
