Citigroup slaps $90 share price target on REA Group Limited

It may sound counterintuitive but weaker auction clearance rates are one reason why Citigroup has upgraded REA Group Limited (ASX:REA) to a "buy"!

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stocks exposed to the residential market have been on the back-foot as worries about falling home prices takes the gloss off the sector.

Ironically, this might actually provide a nice earnings boost to online property classifieds company REA Group Limited (ASX: REA) with the stock jumping 2.5% to $79.90 during lunch time trade after Citigroup upgraded it to a "buy" from "neutral".

The broker noted that lower clearance rates for auctions are a leading indicator of volume growth for REA Group.

"Auction clearance rates declined all through CY17, from the high 70s at the start of the year, to finish in the mid-60s. Historically, falling clearance rates have been a leading indicator of rising new listing volumes, as failed sales lead to a rise in the number of new listings needed per property sold," said Citigroup.

"If clearance rates fall back to a balanced (50-65%) level we expect to see growth in new listings, however a severe decline (~40%) would see risk of declines as vendors withdraw from the market altogether."

This should theoretically also be good news for rival Domain Holdings Australia Ltd (ASX: DHG) although home and apartment builders like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) would be nervously watching for any further signs of weakness in the market.

Coming back to REA though, the outlook for the group looks positive and Citigroup believes that depth penetration rates for new property listings will only increase from current levels of 63% to 69% in FY20 before reaching 80% in the long-term.

"In addition, REA's pricing structure encourages agents to continue to move up the product curve, with this leading to our forecast for a 3-year CAGR of 22% for depth revenue," added the broker.

The stock is outperforming the market with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) up a more modest 0.4%. There's room left for REA to climb too, going by Citigroup's price target of $90 a share.

REA and its peers like SEEK Limited (ASX: SEK) and Carsales.Com Ltd (ASX: CAR) have generated handsome returns over the years for investors thanks to their disruptive platforms.

The experts at the Motley Fool believe they have found the next generation of disruptors that are well placed to deliver supersized returns.

Click on the link below to get your free report what these stocks are.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited. 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 Scott Phillips.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »