CB Richard Ellis: What a Difference a Year Makes

I see today that CB Richard Ellis (CBG), a leading commercial real estate services firm with global operations, priced an equity offering below $4.  I recall the meteoric rise following their 2004 IPO, as the stock was a 7-bagger just three years later.   What a difference a year makes, as the stock closed $39 below its July 2007 peak of $43 in advance of the equity offering. 

The company exacerbated the issue of trees not growing to the moon by repurchasing a ton of stock a year ago (29mm shares at $22 for $635mm).  While the importance of balance sheets was supposed to have been one of the lessons of Enron, WorldComm, Tyco (TYC), etc., one has to wonder what this company was thinking.  Check out these net debt to cap ratios:

• 2004:   39%
• 2005:   24%
• 2006:   48%
• 2007:   61%

Compounding matters, the company has a huge amount of intangibles and little else in terms of assets.  In the most recent quarter, the company had a current ratio below 1.0 (more s.t. liabilities than assets) and short-term debt net of cash of over $700mm.  The recent stock sale was below book value. One has to wonder if the net proceeds of less than $200mm even matter over the longer term given its reliance on external capital. 

(click to enlarge)

Until now, I had never read the SEC filings for this company.  I wish I had, as it was an awesome short candidate.  Despite its 101-year history and its being truly a market leader, this company pursued a dangerous financial strategy.  It's not like they didn't warn - the 10-K is filled with pages of caution regarding their use of leverage.  They incurred debt to finance acquisitions, but this was their choice.  They could have used equity.  I guess their CFO, who resigned recently, learned his lesson.  Will investors learn from this case study?

Disclosure:  No Position

Comments

[investor88:]

Good case study of what went wrong for the company and investors.

2008 Nov 13 09:59 AM

[DrewLew21:]

An awesome short canidate? wow.....anything in real estate was a good short canidate. CBG is poised for considerable appreciation considering their variable cost structure which is a pay based performance, thier increasing revenues through their outsourcing business (grew 30% yoy), and brokering all the FDIC's properities they are getting through all the failing banks (which will continue to grow). As long as they can manage their debt (2 billion) which seems likely considering their FCF they are currently generating this company seems like a great buy.


On Nov 13 09:59 AM investor88 wrote:

> Good case study of what went wrong for the company and investors.

Feb 16 01:44 PM