Road ahead bumpy for CBRE

A property in Evanston leased by CBRE

By Mindy Tan

Analysts warn that the road ahead for CBRE Group Inc. could be bumpy, pointing to uneasiness in certain global economies, unfavorable foreign currency movement, and stiff competition from international, regional, and local players.

This is translating into pressure on its stock price. The closing price of the real estate firm, which is based in Los Angeles, Calif., was $30.34 Tuesday. up 1 percent. The consensus 52-week target price of analysts polled by Bloomberg is $33.83.

The lag in CBRE’s stock performance relative to the broader market is “likely due to investor concerns that the commercial real estate market will, or already has, started to roll over, and the tired story of rising interest rates,” said Brandon Dobell, an analyst at William Blair, in a report dated Dec. 5.

The Standard & Poor’s 500 index climbed 21.55 percent in the last 52 weeks; in contrast, CBRE’s stock rose only 10.99 percent.

CBRE stock vs S&P 500
CBRE stock has lagged the S&P 500 Index. Click to enlarge image. (Source: Yahoo! Finance)

The consensus forward estimated 12-month price-earnings ratio for CBRE is 13.30, versus its trailing 12-month price-earnings ratio of 20.28. Compared with its real estate peers, CBRE’s trailing 12-month P/E is marginally higher than the median 17.93.

The 2016 consensus estimate of analysts polled by Bloomberg have CBRE’s earnings per share at $1.59 per share. The consensus estimate for adjusted earnings per share for 2016 is $2.18, compared with the company’s expected adjusted EPS of $2.15 to $2.30 per share. The company reports its full-year results Feb. 10.

CBRE’s adjusted figures eliminate the accounting effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions, said CBRE in its press release.

For the whole of 2016, the consensus revenue estimate is $13.13 billion, compared with $10.86 billion in 2015.

Valueline analyst Jeffrey Hirt lowered his adjusted profit estimate for the firm to $730 million for 2016, or $2.15 per share, in a report dated Nov. 25. He also lowered his revenue estimate for 2016 to $13.15 billion from $13.35 billion.

“The U.K., a key market for CBRE, has fallen under pressure after the country voted to leave the European Union. U.K. performance figures may remain a drag for the time being while corporate occupiers assess their presence in the region. A related concern of late is foreign exchange fluctuations, due to the significant devaluation of the British pound,” Hirt said.

For 2017, Hirt reduced his full year adjusted EPS estimate by 15 cents to $2.35. He maintained his revenue outlook at $14.0 billion.

“We do not expect much — if any — share-price growth in the near term,” Hirt said in his report. “The stock holds above-average long-term gains potential, but investors should be careful about entering a position here, as the road ahead could be bumpy.”

The other potential quagmire for CBRE lies in the increasingly competitive real estate market.

Bob Sulentic, president and CEO of CBRE Group, said in the company’s third-quarter earnings conference call that competition for brokers is ramping up, and that while CBRE is still recruiting, it will be in smaller numbers.

“We expect to add a couple hundred brokers. It will be off meaningfully from where it’s been, and we simply aren’t going to participate in what we consider to be irrational pricing in the recruiting wars,” Sulentic said.

Morningstar analyst Edward Mui said he expects CBRE to continue to face stiff competition from both small local providers and international peers. This is due to consolidation of institutional real estate ownership and real estate service providers, Mui said in a phone interview.

On the flip side, as institutional owners consolidate their service providers for the sake of logistical ease, they are likely to turn to service providers that are able to provide a wide range of services, he said.

Mui added that CBRE’s reinforcement of its platform with its recent acquisitions, including Norland Management Services Ltd., Whitestone Research Corp., and Global Workplace Solutions, should enable the firm to develop its relationships and cross-selling opportunities over time.

Mui’s diluted EPS for 2016 is $1.91 per share, and 34 cents per share for 2017. The significant drop in 2017 comes from trying to include some cyclicality, Mui said.

“As 2016 wraps up and management provides guidance, that will be revised to something closer to what management says,” Mui said.

He expects CBRE to report revenue of $13.09 billion for 2016, and to drop to $12.86 billion in 2017.

Mui decreased his fair value estimate for CBRE stock to $37 from $40 per share given the outlook of short-term performance and investment activity. Morningstar defines fair value estimate as the analyst’s estimate of what the stock is worth.

While the consolidation does favor larger players, it also means that the business is experiencing fee pressures.

“As commercial real estate continues to be institutionalized, we find that the fees assigned to property sales are being reduced as clients grow larger and carry more weight in spreading around business among a few key firms,” said J.P. Morgan analyst Anthony Paolone in a report on Nov. 28.

That, and the ramped-up investment in systems and technology is exerting pressure that will last for the foreseeable future, Paolone said. His price target for CBRE is $36, up from $35 previously.

Sulentic said CBRE has added a range of consultative and data capability to its advisory and transaction services for occupiers, a service which is also offered to Global Workplace Solutions clients.

“We’re seeing very good results, and we’re counting on those results to be a big part of the future of that business,” Sulentic said.

Dobell of William Blair said he believes CBRE is still in the “early innings” of being able to secure material contract wins as current/future clients — particularly legacy clients of Global Workplace Solutions — move from one-off transactions to multi-service and multi-geographic market contracts, in a report dated Dec. 5.

Dobell’s 52-week price target is between $23 and $38.

Photo at top: A property in Evanston, for which the leasing is managed by CBRE. The real estate group offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. (Mindy Tan/MEDILL)