The market is certainly betting on REA Group Limited (ASX: REA) performing wonderfully over the next few years.
Trading on a sky-high P/E ratio of 37.8x, the company has certainly delivered in the past. According to Commsec, total shareholder return over 10 years is 51.2%, and that's the average each year.
Interestingly, consensus estimates suggest earnings could go close to doubling within the next two years! Earnings per share of $1.95 are predicted in the 2016 financial year, compared to 2014's $1.14.
If REA Group is still trading on a similar P/E ratio – that equates to a share price of around $73.70, well above today's price of $45.30.
So how can the realestate.com.au owner deliver that growth?
Luckily for management, it has a number of irons in the fire for just that purpose.
For a start, the company is paying out roughly 50% of earnings in dividends, leaving the remainder to reinvest in its various operations. With a return on equity of over 36% last financial year, the company is certainly driving shareholders' funds hard. And with more than $250 million in cash and no debt on the balance sheet, REA Group has plenty of firepower to reinvest back into the business or bolt on acquisitions.
Australia still delivers the lion's share of revenue, 90% in 2014, but the group's international operations in Hong Kong, Luxembourg, France and Italy could generate more revenue in future. REA's 17.2% investment in iProperty Group Ltd (ASX: IPP), which is developing similar property businesses in a number of developing countries in South East Asia, and the launch of myfun.com, a property website for Chinese buyers earlier this year, could well be two of the main growth drivers within a few years.
Back home, REA has launched a controversial new fee model for Australian real estate agents, but is also offering new features to buyers. The purchase of property rentals website 1Form Online gives REA a database of 2.4 million renters. Both moves look likely to entrench REA's position as the leading property website in Australia.
A doubling of profit in five years? Certainly looks possible.
