The Bear case for SEEK Limited?

It’s been a reasonably good year for shareholders in SEEK Limited (ASX: SEK) with the share price gaining around 10%.

In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down nearly 1% over the same time period.

With SEEK scheduled to report its full year results on August 19, what would it take for the shares to rally further and equally, could the shares be set for a fall?

In essence, share prices react to unexpected new information. Information already known or forecast is already “priced into” a stock. This concept is known as the efficient market theory and it’s a reason why consensus earnings play such an important part in the near term price movement of a stock.

According to Reuters, the analyst consensus estimate of earnings per share (EPS) for financial year 2016 is 52.3 cents per share (cps).

With SEEK’s shares trading at $16.34, this implies a price-to-earnings (PE) ratio of 31 times.

A PE of 31 times is obviously a premium to the market average multiple and reflects high expectations for above average growth.

These expectations are certainly well founded based on historical EPS growth experience. In fact, over the past decade EPS have increased around five-fold, from 12 cps to 53 cps.

But what does the future hold for SEEK?

Well, the consensus forecast is for EPS to rise in FY 2017 to 60.6 cps, implying growth of 16% year on year.

The driver of this growth is likely to be SEEK’s International division which in the first half of FY 2016 achieved revenue growth of 34% and earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 36%.

It’s noteworthy that the International division has overtaken SEEK’s Domestic division in terms of profit contribution which makes its growth rate all the more influential on overall group results.

The International division also has the potential for long term earnings growth momentum given its global footprint provides exposure to 4 billion job seekers and 28% of global GDP.

Buyer beware

Of course SEEK is not alone in commanding a lofty multiple, peers such as REA Group Limited (ASX: REA) and Carsales.Com Ltd (ASX: CAR) trade at similar levels. These valuations are arguably justified if their above average growth rates continue, however investors need to stay alert for any signs that growth is falling short of market expectations.

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Motley Fool contributor Tim McArthur 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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