Should you buy into the REA Group share price?

The REA Group Limited (ASX: REA) share price is the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as management issued a profit warning with its half year results.

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The REA Group Limited (ASX: REA) share price is the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as management issued a profit warning with its half year results.

The REA share price crashed 4.7% to $74.27 in morning trade with the Beach Energy Ltd (ASX: BPT) share price, CYBG PLC/IDR UNRESTR (ASX: CYB) share price and Afterpay Touch Group Ltd (ASX: APT) share price following behind.

You can blame the slumping property market, upcoming elections and the Hayne Royal Commission for REA's dour outlook even as the largest online real estate portal produced a 20% jump in interim net profit to $176.6 million, a 15% uplift to revenue to $469.2 million and a 17% increase in its first half dividend to 55 cents per share.

Cracks in REA's earnings

But markets are forward looking and the current half isn't looking rosy for the group with management forecasting revenue growth to slow in the second half.

This means we are likely to see downgrades as consensus sales growth forecast for the current financial year is around 14%.

Management also said that revenue growth won't exceed cost growth in the third quarter and that conditions won't improve in the near-term.

"Listings may be weaker in the lead up to the NSW election in March and the Federal election (expected in May)," said REA Group.

"The BIS Oxford forecast for new apartment commencements indicates a continued decline for the remainder of this year."

The recommendation by the Hayne Royal Commission to remove trailing commissions is also expected to have a negative impact on listings although when this recommendation is adopted by government is still an open question.

REA also wrote down $173.2 million in the carrying value of its Asian division as some markets in the region have not performed to expectations.

Foolish takeaway

The group had earlier assured investors that the property downturn in Australia wouldn't have much impact on its growth targets as agents and property developers are spending more on its website to promote their properties.

This reassurance was missing from today's announcement and I think it's too early to be buying the stock, which is likely to still be trading on a FY20 price-earnings multiple of around 25-30 times even after the expected consensus downgrade.

More water needs to pass under the REA bridge before I would be tempted to take a second look.

Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO and CYBG Plc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended REA Group 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.

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