REA Group Limited (ASX: REA) is a digital advertising company that operates Australia's leading property websites and real estate websites in Europe, Asia and the U.S.
Despite the fact that the stock is hovering around its 52-week low, here are five reasons to buy REA today.
1. Strong sales and EBITDA growth
Recent reporting highlights for the nine months ending 31 March 2015 include revenue growth of 21% to $384 million and EBITDA growth from core operations of 30% to $210 million. The results were driven by the continued success of REA's product strategy, which saw Australian residential depth revenue, its suite of property listing products, increase by 38% this quarter against the prior corresponding period.
REA's strong result has been achieved despite a continued decline in national residential listing volumes across the Australian market, reported to be down 7.2% in the third quarter against the prior corresponding period. Lower listing volumes in the quarter were influenced by the earlier Easter break and elections in two states.
2. Strong competitive advantage
REA has a very strong competitive advantage due to its 'network effect'. The network effect means that the more customers who view its website, the more suppliers want to list their products, and with products available, more customers want to view the website. Other companies that enjoy this same type of online competitive advantage include EBay, Wotif, Carsales, Webjet and SEEK.
3. High return on equity and zero debt
Warren Buffett believes that the return that a company gets on its equity (ROE) is one of the most important factors in identifying successful stock investments. REA's ROE has consistently averaged 38.5% since 2005. In 2014, the company generated an ROE of 41%. Even better, REA has had no debt since 2009.
4. Loads of cash
In addition to REA's high ROE and zero debt, the company had $253 million in cash and cash equivalents at the end of 2014. This puts it in a very strong position to make acquisitions – as long as they don't pay too much for overseas acquisitions – and pay dividends.
REA has also enjoyed strong cash flows after investing since 2009. Its cash flow ratio, the quality of its earnings compared to its cash flow, has averaged 1.17 for the past 10 years, and based on its recent announcement there is no reason this is likely to change.
5. Fairly priced
At its current price of around $39 with a price-to-earnings ratio in the mid to high 20s, I believe REA offers one of the best growth opportunities for investment in the Australian share market today.
Foolish takeaway
From a value investing perspective, REA ticks all the boxes. It has strong sales and margins growth, a strong competitive advantage, high ROE, zero debt, loads of cash and strong cash flows, and it's fairly priced.
