REA Group Limited's (ASX: REA) share price and earnings growth continues to defy gravity. In the six months to 31 December 2013, revenue grew by 30%, net profit after tax climbed by 37% and earnings per share also rose 37%. The results marked yet another year when REA was able to beat consensus estimates and deliver impressive growth.
Shareholders have been rewarded as the share price has risen from $3.50 in 2009 to over $45 at the close on Friday. But can this continue? What is driving the impressive growth?
Australia
The answer: Australia. While REA operates real estate websites in Italy, Luxembourg and Hong Kong, it was the Australian business that continued to fire on all cylinders. Australian operations accounted for 89% of revenue and 97% of earnings. The question remains whether REA can continue growing its Australian revenue and earnings as the market matures.
Outlook comments from the company highlighted that price increases were being absorbed by the market, while further price rises were achievable seeing as the company holds the lion's share of the market (78% of all online minutes).
There is also the possibility that the company could change up its strategy to start charging based on the property value, instead of a fixed rate. Roger Montgomery from Montgomery Investment believes a shift to this model may end up opening the company to more niche competitors. In the long run, the real opportunity for REA lies in its international interests.
International investments
REA runs the number one real estate sites in Italy, Luxembourg and Hong Kong. They are profitable but only contribute roughly 3% of group earnings as the moment. Analysts have noted that there is minimal downside risk here but notable upside, especially in Italy with its population of 70 million.
Risks
In an analysis by Roger Montgomery, the key risks for REA group include an Australian property market downturn, the entrance of a better competitor, a poor choice of CEO to replace the departing Greg Ellis and the company's current valuation of 40 times 2014 earnings.
Foolish takeaway
REA Group has made a habit of beating even the most optimistic earnings expectations. Every time an analyst writes 'this must be the last time' they have managed to outperform in the next period. So, with that in mind, it's difficult to make a case that the company will have difficulty growing earnings, but at some stage in the future, the Group's international assets will have to start meaningfully contributing to earnings. In the absence of that, it would be reasonable to assume that significant growth in the small Australian market will be difficult to come by – barring a major structural change that the company is able to leverage off.
