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Is the SEEK Limited share price a bargain?

Man Applying for a Job on the Internet

SEEK Limited (ASX: SEK) is a market-leading growth stock but some investors may be put off by what they consider an expensive share price.

Here are four reasons why today’s price may not be as expensive as you think…

Strong growth – paying up for growth if it doesn’t eventuate is always a problem. However in SEEK’s case there would seem to be a high probability that expected growth will occur.

While SEEK has firmly cemented its position as the leading online employment classifieds operator in the Australian market, it’s the group’s international operations across Asia and Brasil which offer particularly exciting future growth prospects.

High quality business – there are many ways to judge the quality of a business. SEEK’s outstanding growth in operating cash flow which has grown at a compound rate of 29% per annum since 2005 would certainly be one way.

Growing dividend stream – while SEEK remains a low-yielding dividend stock, the dividend is certainly growing. Since 2009, the board has increased pay-outs at a compound rate of 25% per annum.

Attractive price – assuming market expectations are met, SEEK could earn around 69 cents per share (cps) in financial year 2018 according to one analyst consensus forecast.

With the share price at $16, this implies a price-to-earnings (PE) multiple of 23x which is arguably attractive considering the above average growth prospects, business quality and market position of the group. (Source: Thomson Consensus Estimates)

Foolish takeaway

For dyed-in-the-wool value investors it can be hard to fathom paying a high multiple for a stock. However that high multiple needs to be judged against business quality and expected growth rates.

Ignoring quality growth stocks such as SEEK or Ramsay Health Care Limited (ASX: RHC) has meant missing out on share price gains of 302% and 526% respectively over the past decade, which is a reminder of why a high PE stock shouldn’t immediately be dismissed.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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