One thing I’ve noticed as an American in England is that no topic, perhaps aside from the perennial disappointment that is the national football team’s performance at major tournaments, unites the nation more than a shared obsession with property. Discussing or, more accurately, moaning about rising rent and property prices or the benefits and perils of buy-to-let as an investment, has a stranglehold over the population in a way few other subjects can match.
But, as a Floridian who saw first hand the damage done when the property bubble burst in 2007, I view property-related companies as cyclical, often highly-leveraged and unlikely to deliver the same long-term returns as companies with more stable income. This may be thickheaded but it’s also why the only property share I’d ever consider buying is online platform Rightmove (LSE: RMV).
The main attraction of Rightmove is the way it dominates its sector. Sure, there are major competitors such as Zoopla and smaller options such as OnTheMarket, but Rightmove’s 77% market share is more than triple that of its nearest rival. And this dominant position is virtually untouchable as more visitors to the site forces more agents to list their properties there, which then leads to more visitors because the site offers the widest selection of properties.
This market-leading position soothes my doubts about the property sector for several reasons. For one, it means agents are unlikely to switch to a competitor even during a downturn. And, since agents pay a flat monthly fee rather than per listing, even a decrease in the number of homes for sale wouldn’t wreck Rightmove’s business model. This, of course, makes Rightmove far less cyclical than estate agents or housebuilders.
Pricing power
Second, being the go-to choice for consumers and estate agents alike gives Rightmove incredible pricing power. In the first six months of 2016 the average revenue per agent rose 12% year-on-year to £830 per month. And, the combination of charging high prices and running an asset-light business means margins are through the roof. In the same period Rightmove’s operating margins rose to an astonishing 74.6%.
With this level of profitability and little need for pricey capital expenditure, Rightmove can return bundles of cash to shareholders. Of the £80.6m of pre-tax profits recorded in the six months to June a full £66m was returned to shareholders. £25.4m of this came through dividends and a further £40.8m in share buybacks, which is also a positive as it suggests management believes the shares are still undervalued. And even after these major cash outflows the company still maintained a very healthy £13.3m of cash on hand at period-end.
The downside to these key strengths is that plenty of other investors love them as well. That’s why Rightmove shares now trade at a pricey 29.5 times forward earnings. This is certainly a premium price, but I reckon its not an insane one for a company with dominant market share, a wide moat to entry for competitors and a fantastically well-run, co-founder-led business.
