Analysts' Choice: Jones Lang Won't Stay On The Mat

2/15/2016


  Recent Price
$104
  Dividend
$0.58
  Yield
0.6%
  P/E Ratio
10
  Shares (millions)
45
  Long-Term Debt As % Of Capital
16%
  52-Week Price Range
$179.97 - $102.34

Like boxers, investors must often deal with the initial shock and ensuing pain of getting walloped with an unexpectedly hard punch. One stock that has tested our fortitude in recent days is Jones Lang LaSalle ($104; JLL), which posted 5% higher per-share profits in the December quarter but missed the consensus. For the second time in the past four quarters, Jones Lang generated lower operating cash flow, down 14%. More worrisome, net income exceeded operating cash flow in 2015, a potentially troubling sign of deteriorating earnings quality.

Shares responded by plunging 23% since the earnings report and are down 42% from their all-time high, set in August. Still, we cannot make investment decisions based on regret but must rather gauge how the stock may perform going forward. While investors have taken a blow to the gut, we see several reasons to stick with the stock for another round. Jones Lang is a Focus List Buy and a Long-Term Buy.

Rolling with the punches

Jones Lang consistently delivers higher sales at a time when growth has become increasingly rare. In the December quarter, the company posted 8% higher revenue, its 25th straight quarter of growth. Stocks in the S&P 1500 Index averaged sales growth of just 1% for the latest reported quarter, the lowest since March 2010.

Jones Lang's real estate services (93% of 2015 sales, 75% of operating income) continue to profit from robust demand for space. The unit's fee revenue grew 14% in local currency in the December quarter and 17% for the year on double-digit growth for leasing, property management, development services, and advisory and consulting. Management expects leasing volumes, which increased 8% last year, to rise up to 5% in 2016.

The market's recent turmoil poses a threat to Jones Lang's investment-management business (7%, 25%) following several years of strong growth. The unit's incentive fees ($124 million, or 2% of companywide sales) and equity earnings ($70 million, 1%) are far more volatile than the company's other sources of revenue. Jones Lang says incentive fees could slump 40% this year, while equity earnings could revert to historical norms of $25 million to $30 million a year.

Yet Jones Lang plans to keep driving growth via the purchase of small businesses with high profit margins and minimal operational overlap. It announced or completed 24 acquisitions last year and has already closed three deals in 2016; these 27 takeovers cost a total of $640 million.

Conclusion

The stock hasn't looked this cheap in years. Its trailing P/E ratio dipped below 12 for the first time since 2009, while its price/sales ratio stands at the lowest level since 2012.

True, profit estimates are trending lower, with the consensus projecting 2016 earnings of $10.28, which implies 3% growth on 7% higher revenue. But shares trade at just 10 times estimated 2016 earnings, ranking among the cheapest 30% of stocks in our research universe. Based on the lowest analyst estimate of $9.42, the stock's forward P/E ratio is 11.

An annual report for Jones Lang LaSalle Inc. can be obtained at 200 E. Randolph Drive, Chicago, IL 60601, (312) 782-5800, www.jll.com.

JONES LANG LASALLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '15
4.53
vs.
4.33
8%
171.63
-
141.07
18 - 14
Sep '15
2.52
vs.
2.27
10%
179.97
-
141.41
19 - 15
Jun '15
2.01
vs.
1.68
8%
174.83
-
160.04
19 - 17
Mar '15
0.94
vs.
0.38
16%
170.85
-
144.01
20 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.97
10.01
0.56
179.97
-
141.07
18 - 14
2014
5.43
8.65
0.48
154.25
-
101.17
18 - 12
2013
4.46
6.32
0.44
103.23
-
80.86
16 - 13
2012
3.93
5.48
0.40
87.52
-
61.39
16 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
87
64
85
87
51
49
18

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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