With EPS Growth And More, REA Group (ASX:REA) Makes An Interesting Case

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like REA Group (ASX:REA). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Check out our latest analysis for REA Group

REA Group's Earnings Per Share Are Growing

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. That means EPS growth is considered a real positive by most successful long-term investors. Recognition must be given to the that REA Group has grown EPS by 54% per year, over the last three years. That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. On the one hand, REA Group's EBIT margins fell over the last year, but on the other hand, revenue grew. So it seems the future may hold further growth, especially if EBIT margins can remain steady.

In the chart below, you can see how the company has grown earnings and revenue, over time. For finer detail, click on the image.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of REA Group's forecast profits?

Are REA Group Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. Because often, 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.

REA Group insiders both bought and sold shares over the last twelve months, but they did end up spending AU$55k more on stock than they received from selling it. So, on balance, the insider transactions are mildly encouraging. It is also worth noting that it was CEO & Executive Director Owen Wilson who made the biggest single purchase, worth AU$657k, paying AU$68.30 per share.

The good news, alongside the insider buying, for REA Group bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold AU$65m worth of its stock. That's a lot of money, and no small incentive to work hard. While their ownership only accounts for 0.4%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.

While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. The cherry on top is that the CEO, Owen Wilson is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations over AU$11b, like REA Group, the median CEO pay is around AU$5.6m.

The REA Group CEO received AU$4.3m in compensation for the year ending June 2022. That comes in below the average for similar sized companies and seems pretty reasonable. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add REA Group To Your Watchlist?

REA Group's earnings have taken off in quite an impressive fashion. To make matters even better, the company insiders who know the company best have put their faith in the its future and have been buying more stock. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe REA Group deserves timely attention. 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.