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Here’s why things are looking up for the REA Group share price

At the end of 2018 I tipped REA Group Limited (ASX: REA) as one of 10 stocks I expected could do well in 2019 while acknowledging that it might seem an odd call given low listing volumes and falling property prices were two obvious headwinds for the operator of realestate.com.au last Christmas.

However, with the Federal election now out of the way and producing a surprising win for the Coalition, REA Group shares are up 3.7% to $90.93 this morning and up around 23% over 2019 alone.

Admittedly this is not way ahead of the market over a strong start to 2019, but considering REA just hit what its new CEO described as the “worst market conditions in nearly a decade” for property listings we can begin to see how the group’s performance is relatively impressive.

For the six months to December 31 2018 it grew revenue and net profit 15% and 20% respectively, with free cash flow up 23% for the nine months to March 31 2019. A strong result given the genuinely tough operating environment.

Moreover, it seems inevitable that listing volumes will pick up sharply through the rest of the calendar year, while I expect confidence and property prices will also head higher again sooner than most expect.

I’ve also flagged previously how a slower property market is not all bad news for REA Group as it makes it easier for its sales staff  to sell depth listings to vendors’ agents in a bid to get the properties before my eyeballs. As if a property is not selling vendors are more inclined to spend more on advertising in an effort to shift it.

Outlook

Overall then REA Group remains a high-quality operation that looks positioned to enjoy a decent 12 months ahead, although the only fly in the ointment is that its current valuation is already baking in some double-digit growth.

For long-term investors there are also a couple of salient points to note around this business that are emphasised when we compare it to online classifieds rivals SEEK Limited (ASX: SEK) and Carsales.com Ltd (ASX: CAR).

First up, is my belief that REA Group enjoys a far stronger competitive position or moat than either SEEK or Carsales.com.

After all REA Group’s principal competitor is the Fairfax Nine spin-off Domain Holdings Australia (ASX: DHG) with not much other competition to speak of in property classifieds.

While the likes of SEEK and Carsales face competition from tech giants like LinkedIn and Facebook, with others offering similar services in their space for cheaper prices.

Therefore REA Group would appear to have more pricing power than its rivals via a wider moat. This belief is backed up by its more consistent profit growth over the medium term.

Return on equity is also higher towards 30%m which speaks to the capital light business model, while its management team also has a good (but not perfect) track record of capital allocation. Anecdotally, I have also met some staff at REA Group and believe it has some secret sauce in the strength of its sales operations.

As such it continues to tick the boxed for growth-oriented investors, but for now I’d rate it a hold on valuation grounds.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has recommended carsales.com Limited, 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.

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