I’ve long been a fan of Rightmove (LSE: RMV). It’s the clear market leader in its industry, and such domination has inherent investment appeal. However, I’ve previously been somewhat cautious about where fair value rests with this FTSE 100 giant. As such, I’ve also been cautious about how much I should be willing to pay for its shares.
The company released its latest annual results this morning. In another dire day for the markets, its shares are currently down 4% at 610p. They’re now 13% below their record high of over 700p, punched just a couple of weeks ago. Could now be the time to buy?
Robust performance
In today’s results, Rightmove reported the kind of growth numbers we’ve become accustomed to. Revenue was up 8% to £289.3m from £267.8m in the prior year. Underlying earnings per share (EPS) increased 10% to 20.2p from 18.3p. And the board lifted the dividend 11% to 7.2p from 6.5p.
Digging a little deeper into the top-line performance, we find agency revenue increased 4% to £209.3m, new homes revenue increased 20% to £55.5m, and other business revenue (such as overseas and commercial property) increased 19% to £24.5m.
Membership numbers were down 3% over the year. The company said this reflected a decline in mainly low-stock agency branches offset by strong growth in new homes development numbers. As such, it appears the group’s 8% top-line growth was driven by an 8.3% rise in average revenue per advertiser to £1,088 per month from £1,005.
The company maintained its underlying operating margin at an impressive 75.9%. This, together with the continuation of the board’s longstanding share buyback programme, fed down to the 10% rise in underlying EPS.
I’d agree with management that this was “a robust financial performance, despite the backdrop of Brexit and an uncertain UK housing market.” And that it demonstrates the strength of the company’s subscription business model.
Valuation
City analysts reckon Rightmove can sustain annual 10% EPS growth. They’ve pencilled-in increases of this order for both 2020 and 2021. The question is: How much should we be willing to pay for this growth?
At the current 610p share price and £5.3bn market capitalisation, buyers are paying over 18 times today’s reported revenue of £289m. This seems insanely high for a revenue multiple.
However, due to the company’s fantastic operating margin, its earnings valuation is far less extreme at a bit over 30 times today’s reported EPS of 20.2p. And, assuming sustainable 10% EPS growth, the multiple falls to 27.5 this year and 25 next year.
Meanwhile, a running yield of 1.2% on today’s reported dividend of 7.2p isn’t exactly eye-catching. However, I wouldn’t undervalue it. The board’s policy is to increase the payout broadly in line with EPS growth. If annual 10% growth is sustainable, investors could see a markedly higher income in time.
Bottom line
Would I buy the stock today? I think I’ve probably been overly cautious about Rightmove’s valuation in the past. Or, put another way, under-appreciated the many strengths of the company.
Reflecting on the business today, and the valuation after the fall in the share price over the last couple of weeks, I’m seeing reasonable value. As such, I rate it a stock to buy for the long term.
