Street Socks Stock Of CB Richard Ellis
By DANIEL MILLER - 9/17/2007
Los Angeles Business Journal Staff
To get a sense of just how nervous real estate investors are, consider CB Richard Ellis Group Inc.
The world’s largest real estate services firm not only soundly beat Wall Street expectations with its second quarter earnings but doubled its 2007 guidance.
But all that apparently amounts to little. Investors have punished the stock, which is off nearly 40 percent in the last two months.
Though the El Segundo company is highly diversified, at its core it’s a commercial brokerage, and the fear these days – justified or not – is that the commercial real estate sector won’t escape the larger market downturn spurred by the collapse of subprime lending and the stagnant housing market.
“I think what has taken place with the residential side and the subprime has impacted the sentiment of lenders on the commercial side – but there really is limited linkage between residential and commercial space,” said Chief Financial Officer Ken Kay.
Limited or not, over the past two weeks at least three analysts have downgraded the company and shares have continued sliding, closing at $25.52 on Sept. 13. As recently as July 19 the shares reached a high of $41.57.
Though a majority of analysts covering the firm still rate it a buy, the most recent hit came early last week when Goldman Sachs analyst Jonathan Habermann downgraded the company – along with two real estate investment trusts – from “buy” to “neutral.”
Even as he wrote that “growth prospects for the company’s leading global platform remain positive,” Habermann concluded that the tightening of credit terms would likely reduce the company’s volume of sales transactions.
Though the company does everything from managing property, to investing in real estate, to developing projects, commissions on brokered commercial real estate sales generated 31 percent of second quarter revenue.
“We believe that the shares could continue to be choppy in the near term,” wrote Habermann, who expects the company to see a 15 percent decline in investment sales revenue next year.
Big acquisition
Kay maintains that the fears are overblown, and the debt market – where mortgages are securitized and resold – is not as volatile in commercial real estate as it is on the residential side.
“There is still a lot of active trading taking place in the marketplace. There are still traditional players that are still participating,” Kay said, even though he acknowledged “the cost of leveraging is a bit higher or transactions take longer.”
Will Marks, an analyst for JMP Securities LLC, said that he agrees that the commercial market will not experience much more than a short-term decline once initial fears over a wider real estate meltdown subside.
“There is too much money chasing commercial real estate for transaction levels to not pick up – perhaps not to first-half 2007 levels but to still strong levels,” said Marks, who rates the company a “strong buy.”
Though rents are starting to relax in some markets, occupancy rates are high nationwide and there remains a strong demand for space. Moreover, the company, which has expanded into international markets, is seeing a boost from overseas business.
In the second quarter that ended June 30, CB Richard Ellis saw revenue rise more than 70 percent to $331 million in Europe, the Middle East and Africa, and nearly 40 percent to $122 million in the Asia Pacific region. But the company may not be geographically diversified enough.
JP Morgan analyst Michael Fox, who reiterated his “overweight” rating on the company in his last research note, acknowledged that a risk for investors was its continued relatively high exposure in the high-priced New York and California real estate markets “Leaving it vulnerable to the local economic and political conditions.”
Another big issue for the company is its $2.2 billion acquisition of Trammell Crow Co. in December. The acquisition boosted the company’s property management and development arms, but some question whether the costs of paying off the transaction will slow long-term growth.
“As a company continues to grow, there are things that can slow it down,” said Michael Arnold, a managing principal at Newmark Knight Frank, the largest privately held real estate company in the world. Arnold spent about five years as a commercial broker with CB Richard Ellis Group in the 1990s.
Moving forward
However, Kay called the acquisition of Trammell Crow “very opportune” for the company with a “tremendous amount of benefits.”
“It affords us a tremendous amount of revenue-generating sources going forward,” he said.
Indeed, in the second quarter, the Trammel Crow unit accounted for a majority of the company’s revenue growth in the United States and other parts of the Americas.
“CB is generating so much cash flow it will pay off the debt associated with that transaction very quickly. I have no doubt about that transaction,” Marks said.
Habermann outlines a scenario in which the credit markets deteriorate further, depressing the commercial real estate market for a prolonged period. However, Habermann believes that a “middle of the road” situation is more likely.
For this to occur, the Fed would have to keep interest rates low, something that last week appeared more likely as fears of a recession grew on bad jobs reports and other news.
Kay agreed that interest rates will be critical in determining commercial real estate deal volume, a major revenue driver for the company.
“Only time will tell,” he said. “It is a function of what the Fed does and perception in the marketplace. Generally the fundamentals in the marketplace are still pretty solid. The underlying economy, growth in jobs and fundamentals supporting the capital markets are very sound.”
CB Richard Ellis Group
Fastest-growing rank: 33
Get quote: CBG
3-year average annual return: 79%
These days, CB Richard Ellis must feel a bit like Yahoo during the dot-com crash: Sure, Pets.com's stock was due for a collapse, they must have thought, but why do we have to suffer too? So it goes for CBRE.
Never mind that it isn't involved in subprime mortgages. The company provides a wide array of commercial real estate services, such as selling, leasing, and managing properties. Still, CBRE has seen its stock sink 33% from its 52-week high, giving investors the chance to buy shares at a discount: They're trading at just 11 times projected 2008 earnings, about 35% cheaper than the 17 P/E that the company has maintained since going public in 2004 - this for an outfit that expects a 50% earnings-per-share rise in 2007.
CBRE might seem like an unusual candidate for FORTUNE's list of quick-sprouting companies. It's more than a century old, and it's not in some trendy line of business. But it has posted a dazzling 370% total return since its IPO, even after its recent drop. Two successful acquisitions in four years, plus double-digit organic growth for 19 consecutive quarters, have turned it into the industry's largest player, with $4 billion in revenues and a global footprint.
With the debt markets tightening, CBRE's growth won't be as feverish as in the recent past - but it should be strong. Property sales, which make up about 30% of revenues, are slated to increase 6% next year. Deals are still getting done, and bullish analysts point to institutional investors' persistent appetite for commercial real estate as a key driver. Will Marks, an analyst with JMP Securities, projects the stock will reach $48 in the next 12 months. Moreover, the company's leasing division, which makes up another third of its revenues, may pick up some of the slack.
Over time, CBRE's stock price should shed the subprime-mortgage stigma and regain its luster. Says J.P. Morgan analyst Michael Fox, who thinks shares will reach $46 within a year: "There has definitely been indiscriminate selling because it's being lumped in with everything 'real estate.' "
NEW YORK -7 September
Shares of CB Richard Ellis Group Inc. tumbled Friday, with a Lehman Brothers analyst lowering his price target as subprime mortgage fears and credit quality concerns continue to weigh on the sector.
Shares of the commercial real estate services company dropped $2.51, or 9.1 percent, to $25.14 in morning trading. The stock, which has traded between $22.73 and $42.74 over the past 52 weeks, is off 17 percent for the year to date.
Jeffrey Kessler said in a client note that talks with old and new investors have shown that caution remains on companies associated with real estate. While investors acknowledge current conditions are different from the slowdown that occurred from 2000 to 2002, economic uncertainty is leaving many jittery on what they're willing to pay for real estate stocks.
These investor concerns are likely to spill over into the second half of the year, leading Kessler to lower his 2007 and 2008 earnings estimates. He trimmed his 2007 forecast by 5 cents to $2.25 per share and reduced his 2008 estimate by 10 cents to $2.75 per share.
Kessler said that he did not make a deeper 2008 cut because he remains confident in potential upside from the Trammell Crow acquisition and international growth opportunities.
Kessler also cut his price target on CB Richard Ellis by $10 to $37
3-year average annual return: 79%
These days, CB Richard Ellis must feel a bit like Yahoo during the dot-com crash: Sure, Pets.com's stock was due for a collapse, they must have thought, but why do we have to suffer too? So it goes for CBRE.
Never mind that it isn't involved in subprime mortgages. The company provides a wide array of commercial real estate services, such as selling, leasing, and managing properties. Still, CBRE has seen its stock sink 33% from its 52-week high, giving investors the chance to buy shares at a discount: They're trading at just 11 times projected 2008 earnings, about 35% cheaper than the 17 P/E that the company has maintained since going public in 2004 - this for an outfit that expects a 50% earnings-per-share rise in 2007.
CBRE might seem like an unusual candidate for FORTUNE's list of quick-sprouting companies. It's more than a century old, and it's not in some trendy line of business. But it has posted a dazzling 370% total return since its IPO, even after its recent drop. Two successful acquisitions in four years, plus double-digit organic growth for 19 consecutive quarters, have turned it into the industry's largest player, with $4 billion in revenues and a global footprint.
With the debt markets tightening, CBRE's growth won't be as feverish as in the recent past - but it should be strong. Property sales, which make up about 30% of revenues, are slated to increase 6% next year. Deals are still getting done, and bullish analysts point to institutional investors' persistent appetite for commercial real estate as a key driver. Will Marks, an analyst with JMP Securities, projects the stock will reach $48 in the next 12 months. Moreover, the company's leasing division, which makes up another third of its revenues, may pick up some of the slack.
Over time, CBRE's stock price should shed the subprime-mortgage stigma and regain its luster. Says J.P. Morgan analyst Michael Fox, who thinks shares will reach $46 within a year: "There has definitely been indiscriminate selling because it's being lumped in with everything 'real estate.' "
CB Richard Ellis Group, Inc. (NYSE:
CBG) reports Q2 EPS of $0.66 (Excluding one-time charges) vs. consensus of $0.41. Revenues were Excluding one-time charges $1.5 billion vs. $1.35 billion consensus.
(diluted earnings per share increased 118.5% to $0.59 compared to the second quarter of 2006. Excluding one-time charges(1), second quarter 2007 diluted earnings per share was $0.66, representing an increase of 94.1% from the second quarter of 2006)
The Company is increasing its full year guidance for 2007. CB Richard Ellis expects to generate full year diluted earnings per share growth of approximately 50%, excluding one-time charges, as compared to 2006 performance. This raised guidance was based upon the strength of our first half performance and it takes into account that a portion of the gains from the Global Investment Management business were expected later in the year, a lower tax provision rate, and our outlook for the balance of the year. This will be discussed further during our conference call.
September 14, 2007: 12:41 PM EST
NEW YORK (Associated Press) - Shares of CB Richard Ellis Group Inc. slipped Friday after an analyst cut his price target on the real estate services company.
JMP Securities LLC analyst William C. Marks said he still rates CB Richard Ellis a "Strong Buy" and expects the company to earn $2.75 per share next year. Analysts polled by Thomson Financial expect the company to earn $2.66 per share.
Marks cut his price target to $42 from $48.
One of the measures investors use to determine what a stock should be worth is the price-to-earnings ratio, or the relation of a stock price to the company's profit. Even though Marks expects CB Richard Ellis' profit to remain intact, he expects the stock's P/E ratio to contract, leading to a lower stock price.
Marks said investors will be unwilling to pay as much for a company earning the same profit because the profit carries more risk. CB Richard Ellis faces greater risk because of its exposure to U.S. commercial property markets, which could suffer if there's a recession.
Shares of CB Richard Ellis fell 64 cents, or 2.5 percent, to $24.88 in afternoon trading.
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