Shares in Realestate.com.au owner REA Group Limited (ASX: REA) fell 8.5% on Friday after reporting full year earnings that disappointed the market. Reporters have noted that REA Group was priced for perfection on a price-to-earnings ratio of over 40 but delivered results that were ever-so-slightly below perfection.
Would You Be Disappointed?
Net profit for the year rose only 37% to $149.9 million, however this was 2.6% below the $152.8 million expected by analysts. This sums up perfectly how irrational the sharemarket can be.
A company like REA Group, that has had such great success growing the business over the long term, should not be sold off so harshly when it is able to grow profit by 37% yet still invest heavily in expanding the business. To me, this seems like an overreaction and could be a buying opportunity for long-term investors.
Don't Be Concerned
Here are five reasons why I believe REA Group is still attractive:
- Earnings per share, profit and dividend per share all grew faster than revenue growth. This indicates that the business has been built to be scalable and a portion of new revenue flows straight to the bottom line.
- The company is investing in growing its international presence. It spent over $50 million during the financial year on "new technology, products and initiatives such as our Chinese site myfun.com". In addition, it recently picked up a 17.2 per cent stake in fast-growing South East Asia-focused iProperty Group Ltd (ASX: IPP), a move that I consider very smart.
- Analysts are predicting another bumper year for REA Group, with group revenue expected to grow by 22%, net profit by 33% and dividends per share by 32% in 2015.
- Just like rival Carsales.com Limited (ASX: CRZ), REA Group is moving to expand its domestic offering by incorporating a service that will connect customers to utilities and finance providers.
- Finally, I was impressed to see that revenue increased in all of REA Group's segments and earnings before interest, tax, depreciation and amortisation only fell in the Italian segment due to acquisitions and investment in new products.
