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In 2023, I’m looking at the REA share price

The Rea Group Ltd (ASX:REA) share price has risen 45.4% since the start of the 2023. The Wesfarmers Ltd (ASX:WES) share price is 4% off its 52-week low.

REA share price

Founded in 1995, REA Group is a Melbourne-based real estate advertising company that is majority owned by News Corp. In Australia, it operates through its Realestate.com.au platform.

REA Group operates on a global scale and now operates property websites in around 10 countries used by some 20,000 agents. In a typical month, the core Australian website gets over 55 million visits. The business is broken down across geographic lines, with Australia taking the lion’s share of revenue. Within Australia, REA makes money by listing properties for sale or rent (i.e. the agent uses REA’s website to show properties, which the property owner is on the hook to pay). It also makes money from financial services (e.g. mortgage broking), but this is a much smaller part of the business.

Property websites such as Realestate.com.au attract both buyers and sellers and aim to simplify the process resulting in an efficient and stress-free transaction. We believe its competitive advantge is that of any other established platform: network effects and efficient scale. In other words, Domain (the #2 player) is meaningfully behind REA in users and views, which means REA can continue to charge more.

WES share price

Founded in 1914, Wesfarmers is an Australian conglomerate headquartered in Perth. It mainly has operations across Australia and New Zealand, operating in retail, chemical, fertiliser, industrial and safety products.

It’s easy to think of Wesfarmers like a publicly listed private equity company. It has a long history of buying businesses, benefitting from their cash flows, re-investing in them and then selling them for a more attractive price. A good example of this might be Coles Group, which is bought in 2007 and spun out in 2018. However, by far (over 50%) of the company’s operating profit comes from Bunnings, the #1 hardware and home improvement business in Australia. It bought the remaining 52% of Bunnings that it didn’t own in 1994 for $594 million. Other brands include Kmart, Target, Officeworks, Blackwoods and Priceline Pharmacy.

Wesfarmers has long been considered a leading blue chip stock for the average ASX share portfolio. Wesfarmers has quality assets such as Bunnings, Kmart and Officeworks and pays a consistent dividend to its shareholders.

Share price valuation

As a growth company, the way to put a broad estimate on the REA share price could be to compare its price-to-sales multiple over time. Currently, Rea Group Ltd shares have a price-sales ratio of 14.98x, which compares to its 5-year average of 12.29x, meaning its shares are trading higher than their historical average. Please keep in mind that context is important – and this is just one valuation technique. I wouldn’t make a decision based on one metric.

Since it is a more mature-style business, the WES share price is offering a historical dividend yield of around 3.67%, which compares to its 5-year average of 3.84%. The Rask websites, especially our Rask Education platform, offer free tutorials explaining Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). Both of these models would be a better way to value the WES share price.

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