After trading over $65 earlier this year, shares in REA Group Limited (ASX: REA) have fallen nearly 20% to around $53 currently.
REA Group's highly profitable platform, realestate.com.au, has made it one of the best performing stocks on the ASX over the last decade. Anytime shares have dropped 20% in the past, it proved to be a good buying opportunity.
So, is this time any different?
The case can be made that competition for REA Group is now more intense.
Consistently generating a return on equity of well over 40% for many years has meant it has had a target on its back. Domain, owned by Fairfax Media Limited (ASX: FXJ) has recently managed to make up ground on some metrics, with higher earnings growth.
However, slowing growth for REA Group in Australia may be replaced by overseas growth if it can realise the potential of its international platform assets. It now has interests in US-based Move, Inc, as well as various European and Asian platforms through its acquisition of iProperty Group.
REA Group creates substantial value for buyers and sellers. Its fees are relatively small compared to the other costs involved with selling a property, particularly agents' fees. This value gives it pricing power, and it has used this to its advantage in recent years by raising its fees and offering premium listing services.
It is currently trading at around 27.5x earnings estimates for 2017.
Looking at its key metrics, and considering its growth prospects, my view is that REA Group is one of the best businesses among the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO) today.
It is the kind of company to buy for its growth and keep for its dividend.
Investors with the foresight to buy as recently as 2012 would have paid around $12.50 a share. In addition to the huge capital gains since then, the 2016 dividend of 81.5 cents per share would represent a 6.5% yield on cost for those investors.
Investors today should not expect future performance of a similar magnitude. However, analysts' forecasts are for earnings and dividends to continue growing at above 20% for the next few years. This means the current yield of 1.5% could quickly become more appealing for investors looking for income.
In my view, the chance to invest near $50 represents a solid opportunity for long-term investors.
