What: The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 0.5% in early afternoon trade. The star performer has been REA Group Limited (ASX: REA), which today traded up $2.52 or just shy of 6% at the highest point of $45.30. The shares are currently up 5.24%.
REA Group plays a leading role in migrating classified advertising from print to the online world. However, the stock was sold off over 8% last Friday after reporting full year earnings. At first glance this disappointed the market. First glances can be misleading……
Why the negative price reaction and now the reversal?
1. Some initial disappointment on earnings and margins. Revenue for FY2014 was up 30% but earnings suffered due to some increased costs. This view has been partially reversed by acknowledging that REA Group has to make significant ongoing investment, which may limit near-term margin improvement. Should the company reduce some discretionary style spending then an immediate uplift in margins would occur.
2. It is vital for the company's business model to work in unison with real estate agents. The market was worried by real estate agent resistance to new market based pricing. This was not helped by REA Group only providing sketchy details on the take up of the new business model on the day of the release. However, one broker has independently sounded out real estate agents and believes acceptable numbers have agreed to the changeover.
3. Investments such as the recent acquisition of a holding in iProperty Group Ltd (ASX: IPP) were seen by some as insufficient to bolster international earnings. Now, at least one broker considers it a signal for more acquisitions and therefore a stronger growth outlook.
4. Prior to the result, the perception was that the market had priced REA Group for perfection. So a largely in-line result was always likely to be viewed as insufficient. It seems cooler heads have prevailed today!
