The market may be climbing notably higher again, but the same cannot be said for the REA Group Limited (ASX: REA) share price.
The property listings company’s shares are down almost 0.5% to $73.75 in afternoon trade. At one stage they were as down 2% at $72.54.
Why is the REA Group share price on the slide today?
Today’s underperformance appears to have been caused by a broker note out of Morgans this morning.
Although the broker has retained its add (buy) rating on the realestate.com.au operator’s shares, it has trimmed its price target slightly.
According to the note, Morgans has an add rating and $89.55 price target on its shares, down from $92.02 previously.
This is in line with the $90.00 price target place on its shares by analysts at Macquarie Group Ltd (ASX: MQG) at the end of November.
Why has Morgans cut its price target?
Morgans has trimmed its price target by 2.7% after reducing its earnings forecasts due to the expected impact of a slowdown on the construction of new apartments in Australia.
The broker now expects earnings per share of $2.43 in FY 2019 and $2.79 in FY 2020, compared to $2.49 and $2.99 previously.
However, due to its belief that REA Group’s shares are undervalued and the company has many more years of strong earnings growth ahead of it, the broker has retained its add rating.
Should you invest?
Based on Morgans’ earnings forecasts, REA Group’s shares are currently changing hands at 30x estimated forward earnings.
I think this is about fair for a company with such a strong business model and long term growth potential.
In light of this, I would have to agree with Morgans that its shares are in the buy zone right now despite the cooling housing market.
I would suggest investors choose REA Group ahead of rival Domain Holdings Australia Ltd (ASX: DHG). Incidentally, Morgans has a hold rating on Domain’s shares right now.
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group 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.