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Is REA Group Limited a buy?

Many analysts have stated that the share price of REA Group Limited (ASX: REA) is significantly over-valued given the high price earnings multiple on which the stock currently trades. REA Group trades on a price earnings multiple of 46 times FY13 earnings.

However, despite the high price earnings ratio, I believe REA Group is still a great long-term buy at the current share price. Over the last three years, analysts have consistently had “sell” recommendations on the stock, yet the company’s share price and earnings continue to rise substantially. In fact, if you had sold the stock three years ago, you would have missed out on gains of 255% not including dividends. The problem with many analysts’ recommendations is that they are focused on the short term as opposed to the long-term potential of the business.

At the current price of $45, I believe REA Group is not as expensive as it might first appear.

REA Group produced a spectacular half-year result recently with net profit increasing by 37%. Impressively, since 2010 the company has managed to increase profit year-on-year from $51 million to $110 million in FY13. The Australian business segment saw growth of 63%. What I liked most about the increase in revenue for the half-year was that costs during the period remained virtually unchanged. A business that is able to increase revenue significantly without increasing costs has significant market pricing power.

Realestate.com.au is clearly Australia’s number-one residential property site, with Australians spending 78% of time looking at property on realestate.com.au and nine out of 10 agents now listing on the site. The structural move away from print media to online media continues to occur at a rapid rate and will further benefit REA Group going forward. Visits to the REA Group mobile application grew by 112% with mobile site visits increasing by 44% in the six months to 31 December 2013.

The company is also expanding internationally. REA Group operates the number-one online real estate sites in Hong Kong, Italy and Luxembourg. While these operations are currently small, making up 3% of REA Group’s earnings, these investments have the ability to generate significant earnings going forward.

The company’s business model does face some risks, for example consistent price hikes may result in agents boycotting realestate.com.au in favour of a cheaper competitors such as Fairfax Media Limited (ASX:FXJ) owned Domain which is currently a distant second to REA Group in Australia’s online property advertising market. However, as it currently stands, REA is by far and away the leader in the market.

Foolish takeaway

With the share price of REA Group down 12% over the past month, I believe now is a good time to add the stock to a long-term portfolio.

While a price earnings ratio of 46 is high, I believe earnings are going to grow strongly for the next decade and consequently the current price is going to look very cheap in five years’ time.

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Motley Fool contributor Bradley Murphy owns shares in REA Group mentioned in this article.

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