The share price of SEEK Limited (ASX: SEK) is tanking this morning after management tried to offset news of write-downs with reassurances that its full-year results will come in at the top end of guidance. But investors weren’t having any of it with the stock crashing 8.5% to a three-and-a-half month low of $20.05 at the time of writing – making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO). The stock’s heading lower in my opinion as I believe analysts will cut their forecasts and valuation on the stock even as you are reading this. Before…
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The share price of SEEK Limited (ASX: SEK) is tanking this morning after management tried to offset news of write-downs with reassurances that its full-year results will come in at the top end of guidance.
But investors weren’t having any of it with the stock crashing 8.5% to a three-and-a-half month low of $20.05 at the time of writing – making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO).
The stock’s heading lower in my opinion as I believe analysts will cut their forecasts and valuation on the stock even as you are reading this.
Before I get into that though, there are two read throughs from today’s announcement. The first is SEEK is likely to become the hot favourite among short-sellers as the path of least resistance for the stock is down.
The second is that SEEK serves as a warning shot for other market darlings this reporting season. This includes online property website REA Group Limited (ASX: REA) and blood plasma stock CSL Limited (ASX: CSL).
While it’s great that SEEK is on track to deliver revenue growth of 24% (versus guidance of 20%-25%) and net profit of $230 million before investments in early-stage growth options (versus guidance of $225-$230 million) for FY18, its FY19 guidance will be a bitter pill for many to swallow.
Management is tipping revenue growth of 16% to 20% for the current financial year thanks to another strong year of operations from its ANZ and Asian operations but warned that earnings before interest, tax, depreciation and amortisation (EBITDA) would only expand by 5% to 8%.
“The gap between Revenue and EBITDA growth is driven by strong investment into our highest performing businesses where we are confident we will generate a high rate of return,” said the company in a statement to the ASX.
“Approximately 80% of the increase in Group Opex will be deployed into Zhaopin, SEEK ANZ and SEEK Asia to accelerate their growth strategies.”
Brace yourself for consensus downgrades with analysts pencilling in around a 12% increase in earnings per share for FY19. The latest guidance indicates a sharp cut to this assumption and it may take a few years yet before I would feel comfy predicting double-digit EPS growth.
What will try investors’ patience is the $142 million hit SEEK will have to take from write-downs with its Brazilian and Mexican investments dragged down by economic and political challenges in those countries.
Given the rising geopolitical uncertainty around the world, SEEK will test the faith of its followers. As it is, management is warning that things will get worse before they get better for Brazil and Mexico.
Thankfully, its Chinese investments seem to be performing better with its investment in job platform Maimai increasing $36 million.
However, there’s not much transparency around this valuation uplift as SEEK said it “is limited as to the information it can share on Maimai”. That doesn’t inspire much confidence particularly if you consider the opaque investment culture in the Asian giant.
The key issue facing the stock, which can be synthesised into a simple sentence, is that SEEK’s share valuation doesn’t match its growth strategy.
Management will need a number of years before it can show results from its big investments to grow the company (it will need to increase investment by up to a third in FY19), and in the meantime, shareholders are stuck holding a company that will likely generate single-digit earnings growth.
There’s nothing wrong with single-digit growth or taking the long-term view, but the stock is still trading on a price-earnings multiple of around 30 times (before the expected consensus downgrade) – and that’s the kind of multiple only reserved for those that can produce double-digit growth for at least a couple of years.
Even if you are a believer in SEEK, you are probably better off dumping the stock now and looking for a more attractive entry point in the future.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited and SEEK Limited. 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 Scott Phillips.