Rightmove earnings moving in the right direction
Housing markets around the world have struggled to rebound since the financial crisis struck; in the United States, even though there are signs that new home construction may be rising, home prices can’t seem to recover. Europe’s own financial woes, to which real estate speculation and heavy borrowing tied to real estate, have contributed. So it’s not surprising to see that homebuilders in the UK have seen new orders plummet from the highs recorded in 2007. That should spell trouble for any company connected to Britain’s real estate business, but somehow, Rightmove Plc. (RMV.L), an online portal connecting homebuyers with sellers, has managed to defy the odds and has reported revenues that have not only grown but doubled since 2007, which in turn translates directly into higher earnings because of the nature of Rightmove’s middleman business model. But are the earnings sustainable? According to the StarMine Earnings Quality (EQ) model, the answer is a resounding “yes”. The company earns the highest possible EQ model score of 100, which indicates that the earnings appear likely to remain strong in the coming quarters.
StarMine uses computer-driven models to analyze the financial statements of thousands of publicly traded companies, and to calculate a proprietary StarMine Earnings Quality (EQ) scores for each of those businesses. Those companies recording the highest StarMine EQ scores are the most likely to be able to sustain their past earnings track record. (For a more detailed explanation of this model, please refer back to this recent article about the earnings quality of American Express.) This examination of Rightmove earnings is the second in a series of six articles looking at the earnings quality of companies across Europe that rank either especially low or high by our quantitative measure.
Rightmove’s net income, like its revenue, has risen steadily since 2007. In the last reported semiannual period (ended December 31), the company reported net income of £25 million, the highest level on record barring the first half of 2010, when a one-time gain from discontinued operations boosted profits. In an even more impressive feat, the company reported that its cash flow from operations recorded an all-time high of £27 million. In the chart below, the green segment of the bars represents the amount by which the cash flow has exceeded the net income in recent reporting periods – and that has been a consistently positive trend at Rightmove. That is an indicator that its earnings are a result of its healthy business operations, which are generating cash that can either be reinvested in the business or returned to shareholders in the form of dividends.
Even in the midst of the economic headwinds buffeting the eurozone and the UK, Rightmove has managed to improve its operating profit margins. The company makes a commission every time a house is sold via its website, thus it doesn’t have to maintain an inventory. That means its only major costs are its SG&A expenses. Since June 2007, Rightmove’s revenues have doubled from £25 million that it reported in the first half of 2007 to £50 million in the most recent semi annual period ended Dec 31, 2011, while its expenses rose only 25%, from £14 million to £18 million, during the same period. As long as the company’s revenues continue to rise and its managers can continue to control expenses, operating profit margins may well also increase.
Despite the weak housing market in the UK, this Reuters News article discussing the recent increase in the approval rate for home mortgages in the UK seems to hint at what may be a light at the end of the tunnel. For affluent families confronting volatile global markets in the midst of the eurozone’s debt crisis, high-end properties in the UK look like a safe haven. Buying by such investors may have a carryover effect on the rest of the residential real estate market, which in turn will benefit Rightmove. And even if that doesn’t occur, the strong StarMine EQ score of 100 signals that it’s likely that Rightmove will continue to report strong earnings throughout 2012.
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