REA Group (ASX: REA) and CAR Group (ASX: CAR) are both high-quality stocks because they have powerful network effects that bestow pricing power on businesses. I am generally focused on smaller companies, so I don’t often cover the results of any of the large growth stocks other than those I originally started covering when they were small-cap stocks. However, I always make a point to keep an eye on ASX: CAR and ASX: REA because they are two of the highest-quality large-cap stocks on the ASX.
You see, CAR Group and REA Group are the dominant portals for selling cars and houses, respectively. For a website to offer the best prices to buyers, it has to have the broadest selection of sellers. And to be of the most value to sellers, a website needs to attract the most buyers. If you’re looking for a second-hand car or house, you’d be crazy not to check out carsales.com and realestate.com.au. And many adults would already have an account as a result of past transactions.
Of these two businesses, REA Group is superior because a house’s value is much greater than a car’s value. Inevitably, the value of these genuine network effect businesses relates to the value of the transactions they are facilitating. As a result of this superior quality, REA Group always trades at a higher P/E multiple than CAR Group.
CAR Group H1 FY 2025 Results
CAR Group reported H1 FY25 revenue of $579 million, an increase of 9% compared to the previous year. However, proforma revenue of $548m, was up 12% on the prior corresponding period (pcp), when you exclude the divested tyre sales business. Net profit after tax (NPAT) increased by 5% to $123 million, and adjusted earnings per share reached 47.0 cents, up 9% year-over-year. The company declared a 38.5-cent interim dividend, reflecting a 12% increase, and it now trades on a trailing yield of 1.9%. The company has just over $1b in debt. This is not an issue considering it produced over $140m in free cash flow in the last half, but it is still a limitation on growth, especially growth by acquisition.
The outlook for North American growth was downgraded from “good” to “solid” with the AFR suggesting that semantic downgrade explains the share price drop since the results. That may be true, but as you can see above CAR Group is still trading around the top of its 10 year historical range, when you consider the forward P/E ratio. Therefore, I would argue that the market is feeling fairly optimistic about the stock.
REA Group H1 FY 2025 Results
REA Group (ASX: REA) reported H1 FY25 revenue of $873 million, a 20% increase from the prior year, while NPAT increased by 26% to $314 million, and earnings per share grew to $2.38, up 26%. The company declared a fully franked interim dividend of $1.10 per share, a 26% increase, and now trades on a trailing yield of 0.8%. The company reported an “Operating cash flow of $325m, with free cash flow of $258m,” which led to a strong cash position of $338m with no external debt.
The India business is still making losses but grew revenue by more than 40%. The statutory profit was up a massive 246% to $441 million thanks to the sale of its stake in Southeast Asia focused PropertyGuru.
We have previously looked at new buy listings growth to gauge the outlook, and while new buy listings did grow, the growth was only 4% compared to 16% in Q4 last year.
CAR Group and REA Group Remain High Quality
While both CAR Group and REA Group have seen strong share price gains over the last year, partly due to multiple expansion, both businesses remain among the best on the ASX. Personally, I prefer REA Group despite the fact it has a higher P/E ratio and smaller dividend yield. The reason I prefer REA Group is because I believe it has more pricing power, and also because it has a stronger balance sheet. That said, I have owned both stocks in the past and would be potentially buy either stock during a market downturn. I would see no reason for long term shareholders to sell based on these results.
While both businesses will have their ups and downs, it would be completely legitimate to simply hold them long-term, throughout the economic cycle. Overall they both look roughly reasonably priced to me, with REA Group being cheaper compared to its historical range.
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Disclosure: The author of this article does not own shares in CAR or REA and will not trade shares in either for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).