The strong run in the share price of SEEK Limited (ASX: SEK) may be coming to an end with Citigroup warning that Australia's largest and most popular jobs website operator is facing a downgrade cycle.
The stock performed very well this calendar year with an 11% share price gain compared to a flat performance from the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) but the broker is throwing cold water on the party because it believes that SEEK's core Australian business is over-exposed to housing construction. Citigroup estimates that a third of the company's volume growth has come directly from this industry.
SEEK Australia job ads have surged 47% since the low of 2013 with 170,000 ads on its site currently. This matches the previous cycle peak set in 2011 and the biggest driver for the growth over the past four years has been blue collar roles, which have more than doubled. These blue collar roles have largely come from Construction and Trades and Services.
Lots has been written and said about the slowing housing construction cycle as the sector comes off the boil. Some have even pointed out that this is a good outcome and the lower volume of work will provide a reasonably buoyant jobs market.
But Citigroup thinks the canary in the coalmine is the number of architect jobs. It's a small category with only 2,300 job ads, but it has enjoyed strong growth in the last few years. Not any more though. Ads for architects had flat-lined and the broker believes this is a lead indicator for Construction and Trades and Services jobs.
"Australian employment growth remains strong, however growth in SEEK's ad volumes are over-exposed to the housing construction industry and the stock faces a downgrade cycle unless growth in other industries steps up to fill the gap," said Citigroup.
A big reason why the broker thinks the market may not be comfortable with flat earnings is because the stock trades on a FY18 price-earnings (P/E) multiple of around 27 times (based on consensus numbers reported on Reuters).
However, it may be a bit premature to throw in the towel as this bearish view is not universal. Of the 14 brokers who cover the stock, half think the stock will underperform.
Further, plenty of experts have tried to predict a painful correction in the housing market for a while now and somehow the market always seems to do better than what the pessimists expect. I am not saying the risks aren't building, but the Australian economy is performing reasonably well and the outlook for the employment market seems pretty bright with expectations of a bounce back in wages growth in FY18.
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