Why is Seek's share price popping?

By James Greenhalgh

At its AGM last week, Seek’s updated guidance for 2016 to $195m in net profit before early stage investment losses (expected to be around $18m). The absence of IDP’s earnings will prove to be a headwind in 2017, too.

So if profit is going to be a little lower than expected, why has Seek’s share price been surging, up 16% including the value of dividends since mid September when we upgraded the stock to Buy?

Partly it’s due to a recovery in the share price of 63%-owned Zhaopin, the company’s Nasdaq-listed Chinese online employment subsidiary. Since September, Zhaopin's share price is up 25% and the company has reported revenue growth of 18% in the first quarter. That’s on top of 28% revenue growth in 2015.

It might also be due to some surprisingly strong employment numbers for the month of October. According to these figures, almost 60,000 new jobs were created and unemployment fell from 6.2% to 5.9% on a seasonally adjusted basis. Economists have warned that these numbers look unrealistic, but sharemarket investors can be an optimistic lot.

It’s always pleasing to get some good news in the short term, but we’re not necessarily counting on it to continue. Employment conditions in China, Brazil or Australia could yet worsen. Indeed, that’s what we expected was most likely when we upgraded the stock. It just goes to show why putting the macroeconomic cart before the stock-buying horse is usually a mistake.

At the current share price, Seek is trading on prospective 2016 price-earnings ratio of 27 (after deducting the early stage investment losses, which we think is appropriate). That looks high, but Seek is making investments for growth.

Using an EV/EBITDA multiple, the stock is trading on 14 times. That’s reasonable for a high-quality growth stock but it’s no longer cheap enough to buy.

Recommendations don’t always work out this well this quickly and it’s far too early to claim success anyway. The intention is to hold Seek for a long period, as wonderful businesses don’t come along every day. Let’s hope for another opportunity around the corner to top up holdings in this great company.

Disclosure: The Intelligent Investor Separately Managed Accounts own some of the shares mentioned in this article. Staff, including the author, own many of the stocks mentioned.