Here's why Fairfax Media Limited is a better bet than REA Group Limited

While REA Group Limited (ASX:REA) is the bigger company, Fairfax Media Limited (ASX:FXJ) could make the better investment.

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Every investor wishes they had the foresight to buy a growth stock right at the beginning before it 'takes off'.

Imagine for example if you'd bought into leading online real estate classifieds advertiser REA Group Limited (ASX: REA) when it first listed – you'd be sitting on a truly staggering gain (according to CommSec) of 4,625%!

While an investment in Fairfax Media Limited (ASX: FXJ) doesn't exactly let you 'get in on the ground floor' of a growth company, arguably the corporate structure does allow you an appealing opportunity.

Fairfax is of course primarily known for its newspaper business, however, without a doubt the most appealing asset within the group is its Domain business, which is a direct competitor to REA Group.

While Domain has not aggressively grown its offshore exposure and thereby created exciting overseas growth opportunities, in the domestic market Domain holds a commanding position and is expected by some analysts to grow its revenue over the next few years at a faster pace than REA.

At a recent Investor Briefing on Domain Group the management highlighted that the business continues to produce impressive levels of growth:

  • digital revenue over the period from 1 January 2015 to 22 March 2015 soared 34%
  • and domain.com.au revenue leapt 26%

This bodes well for a strong second half after the group reported revenues and EBITDA (earnings before interest, tax, depreciation and amortisation) of $94.5 million and $37.8 million respectively, for the first half of financial year 2015.

REA is valued at over $6 billion by the market; in comparison Fairfax is valued at $2.6 billion. While it's not necessarily the case that Fairfax is cheap in an absolute sense, it is easy to see how a valuation in the order of $1.5 billion could be placed on Domain. If an investor believes the remaining assets plus debt within the Fairfax portfolio are worth more than the current market capitalisation (adjusted for debt) then it could turn out to be a classic value investment opportunity for savvy investors.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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