Here’s why REA Group Limited is a future blue-chip stock

REA Group Limited (ASX: REA) owns and operates numerous websites including the very popular site. With a market capitalisation of $6 billion and sitting outside of the S&P/ASX 20 (Index: ^AXTL) (ASX: XTL) it can’t “technically” be called a blue-chip right now – subjective as the term is – however I’m close to certain that it will be a blue-chip stock in the future.

It certainly doesn’t bother me that REA Group might not warrant blue-chip status at present, in fact, I prefer it that way!

Many blue-chips such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS) could be described as ex-growth with little chance of out-performing the wider index. Therefore if you’re trying to build a portfolio which will beat the market, blue-chips will rarely help you achieve your goal.

In general, blue-chips make great investments for conservative portfolios that are first-and-foremost concerned with capital stability rather than capital growth. In contrast, a smaller business like REA which has the hallmarks of a company that could become a blue-chip one day is growing at a much faster rate.

Consider this…

Outstanding FY 2014 results

Financial year (FY) 2014 saw revenue expand 30% to $437.5 million, earnings per share surge 36% to 113.7 cents per share (cps) and dividends per share jump 37% to 57 cps.

Expanding global footprint

REA has operated in numerous European countries for some years now and its exposure to Asia is increasing outside of China and Hong Kong into South-East Asia thanks to its acquisition in July of a 19.9% stake in iProperty Group Ltd (ASX: IPP). REA has also recently invested in US-based digital real estate business MOVE Inc.

Light years ahead of the competition

When it comes to its “home” market of Australia, REA is miles ahead of its nearest competitor. With 33.6 million monthly visits to its Australia sites, REA boasts visits which are 2.8x (or 20 million visits per month) greater than its nearest competitor and with 4.5x more minutes spent at its site than its nearest competitor.

Strong growth continues

At REA’s recent annual general meeting (AGM), management provided a trading update for the first quarter of FY 2015. The quarterly results showed a 22% increase in revenue to $121 million and a 31% surge in earnings before interest, tax, depreciation and amortisation (EBITDA) to $63 million.

A future blue-chip

The hard thing for value-conscious investors is that a stock like REA Group rarely is cheap enough to buy. This means they are forever on the side-lines admiring the quality of the company as its share price marches higher. It could be described as being ‘between a rock and a hard place’ but for investors looking for a long-term growth story, REA is certainly a stock worth considering.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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