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REA Group share price jumps 6% on earnings boost

REA Group (ASX: REA) has again beaten market consensus for earnings, putting a rocket under the share price to hit a new all-time high of $42.98. The company’s share price has now risen by 133% in the past 12 months as continued innovation and its dominant market share have propelled earnings steadily upwards.

REA, owner of real estate website realestate.com.au, reported pre-tax earnings of $48 million on revenue of $99 million. Earnings and revenue rose by 41% and 27% respectively, pushing the share price up over 6% on Tuesday. REA is 61.6% owned by News Corp (ASX: NWS), which posted slightly more disappointing figures as part of the same US quarterly earnings report.

REA group owns and operates the leading Australian property websites realestate.com.au and realcommercial.com.au, as well the market leading property website in Italy, casa.it, and various other websites and apps throughout Europe and Hong Kong.

Recently implemented initiatives aimed at increasing the average transaction size were the prime contributor to the earnings and revenue growth. The company has introduced ‘depth’ products, as they are known, which offer priority listings, longer listing durations, or targeted email distributions to real estate agent members. REA reported that these products are becoming popular, having gained traction in recent months, and generate greater revenue than vanilla listings.

REA group also announced plans to expand into China with a property website called myfun.com. The website will advertise Australian residential and commercial property to Chinese consumers when it launches next year.

Earlier this year, during the full-year results, REA detailed that the group’s websites accounted for 74% of total minutes spent on Australian real estate sites, with the nearest competitor, Domain.com.au, owned by Fairfax Media (ASX: FXJ), accounting for 19%. In terms of site views, the two REA sites recorded 20.6 million monthly desktop visits (2.5 times Domain.com.au), and the REA mobile phone app registered its 2.2 millionth download. As REA holds such a dominant position in the industry, it’s in the best position to benefit from the recent explosion in media reporting about house price rises. When detailed numbers are released at the end of the year investors should expect an impressive jump in website and app views.

Foolish takeaway

REA continues to find ways of meaningfully growing profit, despite its dominant market share in Australia and Italy. The key risks for the company remain a downturn in housing either through poorly thought-out government policy changes or an earlier than expected rise in interest rates. Potential upside will come from growth in Italy and Europe, and acquisitions in Australia and abroad.

Depending on the level of investment required in Europe and China in coming years, the company’s dividend (of 1.1% currently) may not increase in step with profits. This will likely be offset in the longer term as the company consolidates its international position and concentrates on returning more profits to shareholders.  

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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