The book Killing Fairfax is a great insight into the launch of online classifieds. The far reaching impact of the growth of online classifieds has been the decline in newspaper profitability, as well as the ultimate purchase of Fairfax Media Ltd by Nine Entertainment Co Holdings Ltd (ASX: NEC). As an interested bystander, this has been like watching a slow motion car crash.
Today, 3 major S&P/ASX 200 Index (INDEXASX: XJO) companies dominate online classified sales. While there remain unlisted competitors, the market giants have a clear lead.
Equipment for sale
Carsales.Com Ltd (ASX: CAR) does exactly what it says – sells cars. This is an area that, by itself, supports a large percentage of classified-style sales. However, the company has also branched into motorbikes, trucks, farm machinery, construction machinery and a range of other areas. The Carsales.com share price remains about 13% down, year to date. At the time of writing it is trading at a price-to-earnings (P/E) ratio of ~25. This is approximately 1 point above the 10-year average.
The 10-year compound annual growth rates (CAGR) for sales, earnings per share, dividend and equity are all over 10%. As a growth company, the return on capital expended has been well above 20% for the past 5 years.
REA Group Ltd (ASX: REA) is the largest of the newspaper-killing online classifieds companies. With a market cap of just over $11 billion it is one of the flagship companies on the ASX 200 and our largest IT company. It is also approximately 10 times larger by market cap than its closest direct competitor Domain Holdings Australia Ltd (ASX: DHG).
Like Carsales.com, REA also benefits from word-of-mouth marketing, and it too has diversified into other online classified areas such as commercial properties. Unlike other classified companies, houses are considered an investment. As such, REA also draws revenues from media and data sources.
Many real estate related shares were down this week, including REA, due largely to the Q3 results from the Commonwealth Bank of Australia (ASX: CBA). Commonwealth Bank forecast a reduction in housing prices of between 11% and a worst case of 30%. However, I do not think it will impact REA like the 2008 GFC did. The company is paid predominantly for listings, so I believe it is likely to see revenues remain the same or rise as developers look to offload inventory.
Jobs, jobs, jobs
Of all the online classifieds SEEK Limited (ASX: SEK) is likely to see sustained reduction in revenues from the economic downturn. Our present 6.2% unemployment is masked by the role being played by the JobSeeker payments. And while the Australian economy is well placed to rebound from the current crisis. The same cannot be said for the rest of the world. Trade tensions aside, the impact of COVID-19 on the US, Japan, the UK and many other trading partners is likely to manifest in employment figures.
The Seek share price is down ~23% year to date. Nonetheless it is still trading at a P/E of 39.8. This is a growth expectation that may not reflect the short-term reality.
Of all of the online classifieds companies I like Carsales.com best at present. Its broad diversification in similar sectors will help sustain revenues regardless of economic factors. People sell equipment in both good and bad economies – albeit for vastly different reasons.
The company has been well managed over the long term. It shows solid evidence of continued growth and is currently trading at a reasonable P/E for a definite growth opportunity.