Judging from the average 33 million hits a month it gets, you could say that Australia's number one property advertising and search website realestate.com.au is really popular. Yet many of those daily users may not know much about the company behind it called REA Group Limited (ASX: REA).
Many investors likely know it by now, after watching the company post high double-digit earnings growth in seven of the last eight years. In the space of about ten years, the stock has gone from about $2 to almost $50 currently – a 25-bagger in ten years! You only need a couple of good ones like that in your portfolio to get an above average annual return.
Is it too late to buy now? I think there is still big growth potential for the stock and here's why:-
The housing market is still growing
You can still read about Sydney houses getting snapped up for silly prices, but there is a serious amount of new houses and units being built and sold in the eastern capital cities. And they have to all be advertised somewhere. REA Group has by far the largest number of real estate agency customers in Australia, with 9,664 offices in December 2014, so the company should get a sizable proportion of those listings.
Lower interest rates spur on property purchases and the RBA may have a few more cuts to deliver in coming months. That will cause the housing boom to spread out further from the CBDs into the suburbs and set off the next wave of rising house sales. More sales, more listings and more revenue for REA Group.
Earnings growth begets more growth
REA Group's net profit margin is consistently high. In its recent half-year results, it made a $126.4 million profit on $292.8 million in revenue, giving it a 43% net profit margin. Over time it can retain a lot of earnings and build up a very enviable cash position. The company holds no long-term debt. It was able to make a $200 million investment just from its cash for a 20% stake in the third-largest property advertising company in the US called Move Inc. This could set the company up for even more growth.
Expansion into new regions
REA Group still has a lot of growth ahead of it because The Move Inc acquisition done together with Rupert Murdoch's News Corp opens up a space in the US$14 billion property advertising market in the US. The top three online real estate players (including Move) control less than $1 billion of the advertising spend. REA Group can capitalise on that highly fragmented market and build up market share.
