I'm not being facetious when I say I do not see the long-term downside for this company. The company has massive market-share for real estate advertising. Notwithstanding the impending property market correction I imagine vendors are going to have to remain competive in advertising even if they are ultimately accepting less for their properties as supply catches up. I think this company will continue to perform and demonstrate resilient pricing power during the next property down-turn whenever that may occur.
Perhaps the Wolves of Wall Street out there can tell me how this greedy piggy has built a house made from straw.
** Edit 5/07/2019 ** I had even less idea when I posted this than I do now. I’m closing this recommendation today with the price reaching my arbitrary guesstimate of intrinsic value through a combination of luck and possibly inflation. Needless to say, there was no ‘margin of safety’ for me in this one.
A review of the material elsewhere on Strawman has forced me to more objectively consider the cyclical risks facing REA Group going forward. I maintain that the buisness model will continue to produce significant revenue even during slowing or negative growth in housing. However, I think the biggest risks attached to the ongoing return on this investment in such times may come from:
- A likely hit to the premium it currently enjoys. With a price per earnings of 43 the company would be due for a significant re-rate in a housing down-turn and any associated broader macro trends in Australia, such as a recession; and
- The company is now carrying significant debt. Servicing this debt in a higher interest rate environment would eat away at the company's profit margins.
I maintain my forecast at this time as I make know pretence of knowing how long the good times are going to continue. For my part though I have reduced my own position by 50% and am applying the capital to other opportunities to rebalance my portfolio a bit. I was concerned about leaving too much on the table if this is indeed a late stage bull market.
