Why did Morgans just downgrade this popular ASX 200 stock?

A woman puts up her hands and looks confused while sitting at her computer.

A woman puts up her hands and looks confused while sitting at her computer.

One leading broker appears to believe that the REA Group Ltd (ASX: REA) share price could have peaked for the time being.

As a result, its analysts have downgraded the ASX 200 stock to a hold rating this morning.

Why has this ASX 200 stock been hit with a downgrade?

According to a note out of Morgans, its analysts have downgraded this property listings company’s shares to a hold rating on valuation grounds.

Although the broker responded to REA Group’s third-quarter update by increasing its price target by 9% to $145.00, this is only modestly higher than where the ASX 200 stock currently trades.

As a result, the broker feels that its shares are about fair value and investors ought to wait for a more attractive entry point.

What did the broker say?

Morgans highlights that REA’s third-quarter update revealed that trading conditions have got tougher. It commented:

REA has released its 3Q23 trading update. It was broadly a tougher quarter overall for the group, as it cycled a very strong pcp with volumes continuing to be impacted by the challenging macro. 3Q23 revenue of A$269m was down 3% on pcp with a weaker Aus resi (revenue -6% on pcp) partially offset by a strong India performance (revenue +63% on pcp).

As a result of the above, the broker feels the company is unlikely to achieve consensus expectations in FY 2023. It adds:

For the 9 months FY23TD, group revenue is A$887m (+2% on pcp), which implies a ~15% 4Q23 sequential growth performance is needed to meet current FY23 Visible Alpha consensus of ~A$1.2bn. Group operating expenses of A$133m for the quarter are up 9% on pcp (largely related to planned REA India investment and tech costs), with core Australia operating cost growth relatively constrained at +3% for the quarter. Operating EBITDA (ex assoc.) of A$136m is down 13% on the pcp.

Still a high quality company

It is worth noting that Morgans still believes that REA Group is one of the highest quality ASX 200 stocks around, despite its downgrade. However, it just feels that its valuation is getting full now. The broker concludes:

REA remains one of the highest quality franchises in our coverage with a management team that continues to execute well. However, with near term listings headwinds impacting topline growth and the stock now on ~39x FY24F PE (~1 standard deviation above its 10-year average), we believe the stock to be closer to fair value. We move to a Hold recommendation.

The post Why did Morgans just downgrade this popular ASX 200 stock? appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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