Is the REA Group Limited (ASX: REA) share price a buy?
The REA Group share price has been an excellent performer in 2019 so far with its share price higher by over 40%. The realestate.com.au owner is loving the property recovery.
But, with REA Group now trading at 34x FY21's estimated earnings, I think it's worth questioning whether it's actually a buy or not.
A buy
When you identify a high-quality company it's good to have it as part of your portfolio. Expanding businesses can grow into their valuation over time even if you overpay. REA Group is certainly one of those high-quality names with a very strong brand, an excellent platform with network effects, a high return on equity (ROE) and good levels of re-investment back into the business.
There have been several recent factors since the federal general election which have improved the outlook for the property market including the Liberal win, the APRA change and the lowering of interest rates by the RBA.
This could encourage more properties to come onto the market, which would be a pleasing boost to REA Group's earnings.
REA Group has also proven that it has the market power to implement good price increases with little detriment – this is a very powerful position to be in.
Over the long-term, its investment stakes in overseas property sites could turn into attractive profit generators for the business.
Not a buy
It may be a little early to start saying that the property market is saved from declines. Property owners have been paying for the more expensive ads over the past year to get their properties noticed and sold, but they may not need to go that extra step if buyers are more enthusiastic.
The REA Group valuation has risen quite a lot. Lower interest rates do somewhat justify the price, but I'm not sure if today's price is actually good value. REA Group's core earnings growth is likely to be slower in the shorter-term, so it may not be able to command such a high earnings multiple.
Therefore, I wouldn't mind buying a small parcel of REA Group shares, but I think there are better value growth shares out there.
