REA Group Limited, Carsales.Com Ltd or SEEK Limited: Which is the best buy?

REA Group Limited (ASX: REA), Carsales.Com Ltd (ASX: CAR) and SEEK Limited (ASX: SEK) have dominated their industries in similar ways. Each took advantage of the transition from print to online media in Australia, grew the most popular portal in their respective market (property, cars, and job advertising), and exploited the network effect to grow their business.

All three companies have been strong performers for shareholders, and they are now at various stages of an international expansion plan.

Here is how they look today based on some key metrics:

REA Group Carsales.Com SEEK        
Enterprise Value $7.19 b $2.62 b $5.15 b
Trailing P/E ratio 35.05 22.78 28.31
Forward P/E ratio (FY2018) 22.62 18.09 20.86
P/E Growth ratio (5 year expected) 1.23 1.64 1.55
Return on equity 39.8% 46.6% 22.0%
Dividend yield (forward)  1.8% 4.0% 2.9%
Pullback from 52-week high 20% 26% 16%

Data source: Yahoo Finance

As you can see, REA Group is the largest by enterprise value, and also the most expensive based on its P/E ratio of around 35. Despite this, its P/E ratio is the lowest of the three when adjusted for analysts’ estimates of 5-year earnings growth rates However, any 5-year estimate clearly must be taken with a grain of salt.

Looking slightly more short term, Commsec provides P/E growth ratios on the basis of 2-year forecasts. This gives ratios of 1.54, 2.28, and 1.48 for REA Group, Carsales, and SEEK, respectively. By comparison, the overall market has a P/E growth ratio of 1.47.

Even after a pullback of 26%, a P/E growth ratio of 2.28 for Carsales suggests the current P/E ratio is still not very low relative to analysts’ estimates of its growth for the next 2 years. On this basis, it may not be surprising to see shares fall further.

On the other hand, the dividend yield of 4% is starting to look attractive to income investors who may step in and provide some support to the share price.

Analysts’ expectations for REA Group and SEEK suggest relatively lower yields of 1.83% and 2.85% respectively. and REA Group currently earn most of their revenue from their Australian interests. However, SEEK is further down the track with its international strategy with more than 50% of revenue now coming from foreign sources.

If the three companies can maintain their existing competitive advantages in Australia as they continue to implement their strategies overseas, they are likely to provide solid returns to shareholders over the next 5 to 10 years.

At current prices, REA Group is my pick of the three for long-term investors.

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Motley Fool contributor Matthew Bugden 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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