Seeking Perfection* (*with apologies to George Orwell)

Seeking Perfection* (*with apologies to George Orwell)

It was a rather gloomy week of economic data releases – total job advertisements in Australia and New Zealand were down by 2 per cent for the month of August, while unemployment rose from 5.7 per cent to 5.8 per cent over the same period. And yet the share price of Seek, Australia’s leading employment classifieds website owner, has risen by 1.7 per cent over the week. That raises the question; why are the rising unemployment headlines not having the same adverse impact on the company’s performance as they once did?

For most of its history, the majority of Seek’s earnings have been generated from online job advertisements. Even though management successfully robbed newspapers of their rivers of gold, the company’s performance was largely dependent on the health of the economy.

To ensure that the company did not itself go the way of print media, management had a view to use the company’s position to constantly innovate and add value to users and shareholders. These initiatives have taken time to meaningfully contribute to the company, but they are now beginning to generate impressive returns. As these divisions grow, the less reliant the company becomes on the domestic job market.

Here are a number of factors that explain the weakening relationship between total domestic job advertisements and Seek’s earnings:

1) For many years, management has been buying job boards overseas and investing in its learning division. While this initially helped grow the top line, it has taken time for management to reform these divisions to generate material profits. In recent years, the profitability of these divisions has improved considerably. In 2012, Seek Domestic accounted for 79 per cent of the group’s earnings. Just one year later, in 2013, it accounted for 59 per cent.

2) Seek has sufficient pricing power to ensure that any fall in classifieds volumes can be offset in part by increasing yields. The volume of ads placed on Seek fell by 13 per cent in 2013, but the company was able to insulate earnings by increasing prices by 8 per cent.

3) The structural change from print to online that decimated newspaper classifieds is still progressing, which means there is plenty of potential for Seek to organically grow its domestic division. In the USA, 90 per cent of the employment classified market is online. In Australia, online classifieds still account for just 63 per cent of the market.

4) Seek is becoming more effective at generating returns from its vast database of users. For instance, an employer would traditionally place an ad online and then be forced to go through hundreds of candidates, which takes both time and resources. To address this, Seek is rolling out new products and services that better assist employers find the right person for the job.

Inevitably Seek’s share price will reflect irrational enthusiasm for its organic growth potential, the hedge provided by its internationally diversified portfolio and the fact that it owns one of the most valuable competitive advantages, the ability to raise prices without a detrimental impact on unit sales volumes. For now however the price remains near our estimate of intrinsic value* – something that cannot be said for its expensive online brethren.

*Our valuation is above those you might find from looking at consensus analyst numbers because our forecasts are more optimistic for Seek and we believe analysts might be forced to play catch up.