Analysts' Choice: CBRE Off Focus, Still Rated Buy

5/23/2016


  Recent Price
$28
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
13
  Shares (millions)
338
  Long-Term Debt As % Of Capital
48%
  52-Week Price Range
$39.00 - $22.74

We are dropping CBRE Group ($28; CBG) from the Focus List. The world's largest provider of commercial real estate services, CBRE controls a 22% share of a highly fragmented market. Recent volatility in global markets has caused investors to fret that CBRE's clients will become more reluctant to pursue real estate transactions.

CBRE shares have slumped 18% in 2016, far worse than the 3% dip for the S&P 500 Index Financial Sector Index and flat returns for the broader index. Even after CBRE posted fairly upbeat March-quarter results, the stock extended its decline.

Despite disappointing share-price action, CBRE offers strong operating momentum, rising analyst estimates, and a low valuation. For now, CBRE remains a Buy and a Long-Term Buy, though we may further downgrade the stock if it doesn't stabilize soon. 

Business breakdown

CBRE draws about 31% of its revenue from advisory services, which includes real estate leasing, appraisals, and investment sales and special financing in capital-market transactions. For outsourcing services, accounting for 26% of revenue, CBRE uses its expertise to help manage facilities.

CBRE also offers a wide range of commercial-property services in Europe, the Middle East, and Africa (28% of sales), as well as in the Asia-Pacific region (11%). Finally, CBRE's global investment-management unit (4%) helps pension funds, insurance companies, and other institutions invest in real estate.

With expectations for the seasonally light March quarter fairly low, CBRE topped consensus estimates for both per-share profits and revenue. Global leasing revenue jumped 15%, driven by 20% growth in the U.S. Sales fell 18% for the  investment-management unit, reflecting the volatile market. CBRE generates nearly half of its sales outside of the U.S.; unfavorable currency exchange stunted growth.

For now, the U.S. market for commercial real estate appears healthy. CBRE says U.S. vacancy rates are declining for office, industrial, and retail space, a trend expected to persist throughout the year.  The company's structural changes are also encouraging. By shifting into less-volatile business lines, CBRE has boosted recurring revenue. Contractual fees and leases represented 74% of total fee revenue in the March quarter, up from 70% in the year-ago period.

Conclusion

Last month, management reaffirmed its 2016 guidance for per-share profits, projected to reach $2.27 to $2.37, up 11% to 16%. Since the announcement, the consensus estimate has risen $0.04 to $2.33 per share, implying 14% growth.

Analysts see CBRE's revenue climbing 25% for the year, including 34% growth in the June quarter and 26% in the September quarter. CBRE has grown sales at least 10% in each of the past 11 quarters, a feat matched by no other S&P 500 financial stock and just 13 other stocks in the broad index.

At 13 times trailing earnings, CBRE shares offer a 33% discount to their five-year average and a 34% discount to the average S&P 500 financial stock.  An annual report for CBRE Group. Inc. is available at 400 S. Hope St., 25th Floor, Los Angeles, CA 90071; (213) 613-3333; www.cbre.com.

CBRE GROUP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
0.36
vs.
0.32
39%
37.79
-
26.99
18 - 13
Dec '15
0.81
vs.
0.68
33%
38.63
-
30.85
20 - 16
Sep '15
0.51
vs.
0.40
19%
39.00
-
36.28
21 - 20
Jun '15
0.42
vs.
0.36
12%
39.77
-
31.75
23 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
10.86
2.05
0.00
39.77
-
30.85
19 - 15
2014
9.05
1.68
0.00
35.37
-
25.47
21 - 15
2013
7.18
1.43
0.00
26.58
-
19.78
19 - 14
2012
6.51
1.22
0.00
21.16
-
14.97
17 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
87
65
79
82
40
79
34

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


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