The market responded positively to annual results from Rightmove (LSE: RMV) today. The UK’s leading property listings website reported an increase in traffic for the 16th consecutive year, a record number of estate agents listing homes and a double-digit rise in average revenue per advertiser.
The company said revenue increased 11% to £243m in 2017, with underlying operating profit also rising 11% to £184m. Combined with the benefit of an ongoing share buyback programme, underlying earnings per share (EPS) increased 14% to 163.3p and the board hiked the dividend by the same order to 58p.
Maturing growth company
As the market leader and with terrific profit margins and cash conversion, Rightmove is a hugely attractive proposition for investors. Shareholders have seen an annualised total return of close to 25% over the last 10 years, compared with little more than 6% for the FTSE 100.
However, EPS and dividend growth have begun to moderate of late, although analysts do expect the company to be able to maintain the current lower-double-digit growth rate. At a share price of 4,380p (up 1.6% on the day), Rightmove has a market capitalisation of just under £4bn, so we’re looking at a more mature growth company at this stage. How much should we be willing to pay for this growth?
Too expensive?
Assuming continuing 14% growth in 2018, EPS would increase to 186.2p, giving a price-to-earnings (P/E) ratio of 23.5. Not only is the P/E relatively high, but also the P/E-to-growth (PEG) ratio of 1.7 is on the ‘poor value’ side of the PEG ‘fair value’ marker of one. Meanwhile, the dividend would advance to 66p, giving only a modest yield of 1.5%.
My Foolish friend Ian Pierce has written about why he’d be happy to pay the premium price for Rightmove, despite the slowing housing market. However, for me, the stock is a ‘sell’. For one thing, I see the rating as much too high for the expected lower-double-digit growth of the future. And for another, while the business may be relatively resilient in a housing downturn, this didn’t stop its highly-rated shares losing around 75% of their value peak-to-trough in 2007-09.
Boom and bust
In a trading update last month, Taylor Wimpey (LSE: TW) signalled it would be posting a strong set of numbers when it releases its annual results (next Wednesday). My Foolish friend Bilaal Mohamed discussed the bull case for the housebuilder, which analysts expect to deliver EPS of 19.4p and a dividend of 13.7p.
At a current share price of 190p (10% below its high of earlier this year), the P/E is just 9.8 and the dividend yield is a massive 7.2%. However, housebuilders’ margins and price-to-book values are at cyclical highs and the generous P/E and yield are indicative of a market already beginning to anticipate and price-in a downturn in the housing cycle.
The time you really want to be buying stocks in this industry is when the picture is the mirror-opposite: P/Es high or off the scale, dividends cut or suspended, margins low or non-existent and the shares at a discount to book value. On the basis that you can’t buck the market or the housing boom-and-bust cycle, I’d also rate ‘cheap’ Taylor Wimpey a ‘sell’ at this stage.