Seek: AGM 2015

Online employment listings company Seek held its annual meeting last week. While there was little in the way of new information released, the company provided an update on its earnings guidance for the 2016 financial year.

Seek's previous guidance of a net profit of $200m before losses from early stage investments took into account a full year of earnings from its 50% stake in IDP Education. However the company recently sold its stake in a float on the ASX (see IDP Education's ultimate test from 26 Nov 15 (Hold – $3.25)). Seek's new guidance takes into account that it will receive only a 5-month earnings contribution from IDP in 2016.

As we mentioned in Seek downgraded from 3 Nov 15 (Hold – $13.46), that means the sale of IDP will be dilutive to earnings. In total, Seek will lose approximately $12m in net annualised earnings (netting off the interest saved from the earnings lost). Selling IDP might have made strategic sense although the financial benefits are not obvious, particularly as the company will need to pay $97m in tax and costs from the sale proceeds.

All in all it's a minor grumble, particularly as Seek has plenty of reinvestment opportunities. Seek's updated guidance for 2016 is $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? It's performed surprisingly strongly – up 16% including the value of dividends – since Seek finds success overseas from 8 Sep 15 (Buy – $12.06).

Zhaopin performance

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 the October 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 Seek to Buy in September. 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 as we've mentioned before. 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.

Another opportunity in Seek might be just around the corner, so keep some powder dry. With the stock up 3% since Seek downgraded from 3 Nov 15 (Hold – $13.46), our recommendation remains HOLD.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Seek. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Seek.