4 big reasons why REA Group Limited shares keep rising

Credit: Diliff

Shares of online real estate advertiser REA Group Limited (ASX: REA) reached a new all-time high yesterday after rising more than 4% to trade briefly above $60 a share.

The interesting thing to note about yesterday’s strong rise was that there was no obvious catalyst for the move. There were no specific media reports relating to REA Group and the company itself has not released any market moving news for more than six weeks.

Instead of speculating on a possible reason behind yesterday’s big move up, I think it would be a better idea for investors to look why REA Group has been one of the most successful companies on the ASX over a long time.

A number of reasons immediately stand-out including:

1. REA Group has an economic moat – Despite the best efforts of Domain and other online competitors, REA Group remains the market leader in Australia by a fair margin, as highlighted in the slide below.Source: REA Group 1H16 PresentationSource: REA Group 1H16 Presentation

The company has used this point in their most recent advertising campaign with the clever catchphrase: “If you’re not on, you’re not in the market”. This message will resonate with buyers, sellers, renters and real estate agents and reinforces the ‘network’ effect that sees its website achieve the most views and have the most listings of any other website.

2. REA Group has continued to prosper in a challenging environment – The residential property booms that have occurred in the Sydney and Melbourne markets over the past couple of years have actually made business conditions for REA Group more difficult as fewer properties have been advertised online. In order to combat this issue, the company has been successful in offering a premium listing service aimed at developers and luxury property vendors. This highlights the point that REA Group’s dominant market position allows it to successfully charge premium prices even in a challenging environment.

3. REA Group has an impressive track record of increasing profits – As the chart below highlights, revenue and profits have increased at double-digit rates for the last five years with this trend likely to continue this year as well.

Source: REA Group 1H16 PresentationSource: REA Group 1H16 Presentation

While that is impressive in itself, I think the expansion of REA Group’s operating margin (blue dotted line) is even more impressive. The company has done a great job of keeping costs under control and realising the benefits of additional scale. Fast growing companies can often get this wrong, but REA Group has been able to lift its operating margins from around 44% in FY12 to 59% in the first half of FY16.

4. Overseas expansion and strategic acquisitions to drive future growth – Although the Australian segment still contributes the majority of the group’s overall profits, REA Group has made it clear it is looking abroad to boost future earnings. The company recently acquired iProperty Group in a bid to become the dominant force in South East Asia and has also made a significant investment in to gain exposure to the massive North American market. The company’s current international network is highlighted below:

Source: REA Group 1H16 Presentation

Source: REA Group 1H16 Presentation

Foolish takeaway

REA Group shares often appear expensive when compared to the broader market but investors need to remember that this is not your average company. It has a dominant market position, enviable track record and a positive growth outlook. When you consider these factors together, it is not hard to understand why the shares keep rising.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. 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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