The biggest change in advertising in recent years has been the shift from print to online services. For job seekers and employers it has been Seek (ASX: SEK), for travel and accommodation, Wotif.com Holdings (ASX: WTF), and for motor vehicles, Carsales.com (ASX: CRZ).
All have excelled, largely due to having well-designed and user-friendly websites that enjoy first-mover advantage. The marginal cost to add a customer to the database of any of these is trivial, meaning that, once established, an online service can grow inexpensively, providing strong earnings growth to the provider.
REA Group (ASX: REA) dominates the real estate advertising market in Australia. So strong is the brand that nine out of 10 real estate agents in Australia use it. Industry figures indicate that REA Group occupies 78% of time spent by Australians on property sites.
REA Group is diversifying its spread into related markets, including commercial property and businesses for sale. However, the really exciting potential is the international market, where the company is starting to see success. REA Group currently operates websites in Hong Kong, Italy, Luxemburg and France.
Earnings per share are forecast to grow from 83.3 cents for the year ending June 2013, to 109.0 cents for 2014, 135.0 cents for 2015 and 177.9 cents for 2016. I expect even better outcomes than these figures, once overseas market penetration kicks in. Earnings per share have averaged 35.5% for the last four years, ranging between 34.9% and 36.7%. The balance sheet is strong with no debt.
It was stated in the February 4 REA Group Investor and Analyst Presentation for the latest half year that the purpose of the company is to help "people live their property dreams by making the entire property process simple, efficient and stress free." If REA Group can extend that aspiration to overseas markets, then there is a very bright future indeed.
Foolish takeaway
Although by conventional standards the price to earnings ratio is very high, the price is still trending upwards and will look cheap with hindsight in the future. I would be happy to buy REA Group for the medium to long term under $45.
