Yahoo Finance Should You Be Adding REA Group (ASX:REA) To Your Watchlist Today?
Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like REA Group (ASX:REA), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Check out our latest analysis for REA Group
REA Group's Earnings Per Share Are Growing.
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. Who among us would not applaud REA Group's stratospheric annual EPS growth of 44%, compound, over the last three years? That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). On the one hand, REA Group's EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Fortunately, we've got access to analyst forecasts of REA Group's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are REA Group Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
In the last twelve months REA Group insiders spent AU$55k on stock; good news for shareholders. This might not be a huge sum, but it's well worth noting anyway, given the complete lack of selling.
Along with the insider buying, another encouraging sign for REA Group is that insiders, as a group, have a considerable shareholding. With a whopping AU$72m worth of shares as a group, insiders have plenty riding on the company's success. That's certainly enough to make me think that management will be very focussed on long term growth.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Owen Wilson is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like REA Group, with market caps over AU$11b, is about AU$5.2m.
The REA Group CEO received AU$4.4m in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.
Is REA Group Worth Keeping An Eye On?
REA Group's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. What's more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest REA Group belongs on the top of your watchlist. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if REA Group is trading on a high P/E or a low P/E, relative to its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of REA Group, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
