There are many signs pointing to a significant recovery for Grubb & Ellis (GBE). The stock is priced at a significant discount to industry peers and as the commercial real estate market continues to improve, these shares could rally significantly. Even if commercial real estate values do not rebound, these firms can do well as they earn revenues from leasing deals and sales transactions. There are several reasons to consider GBE at this time:
First of all, there is a clear upward trend for the industry with leasing and sales activity advancing for GBE, and industry giants like CBG and JLL. GBE has been posting improved results for each quarter in 2010, and GBE is likely to start posting a profit in the 4th quarter for the first time in a while and possibly be profitable throughout 2011. This is the main catalyst I see for the stock.
Next, if you look at the valuations for GBE, CBG, and JLL, it shows that GBE shares have significant room to grow based on the revenues and enterprise values for these three companies. CB Richard Ellis (CBG) has an enterprise value of roughly $8.2 billion with revenues of about $4.5 billion. Jones Lang Lasalle (JLL) has an enterprise value of roughly $3.6 billion with revenues of about $2.67 billion. Grubb & Ellis has an enterprise value of roughly $183 million with revenues of nearly $600 million. This shows CBG's enterprise value is about 1.8 times annual revenue and JLL's is about 1.4 times annual revenues. GBE's enterprise value is substantially less at only about 1/3rd of annual revenue. CBG and JLL deserve to have a higher valuation because they are currently profitable and GBE has shown losses, however, GBE is likely to post a profit next quarter and the gap between these valuations should narrow in time.
To look at this another way:
- CBG's revenue per share is about $15 and the shares currently trade for about $19.
- JLL's revenue per share is about $64 and the shares currently trade for about $80.
- GBE's revenue per share is about $9 and the shares currently trade for about $1.08
If GBE is able to return to profits as the larger competitors have, the numbers above indicate that the shares have serious upside potential. GBE management have been cutting costs and I believe that lower expenses combined with rising revenues will lead to profits and a much higher stock price. There is always the possibility that a competitor will want to acquire GBE as it would be an easy way to add revenue and the acquiring company would benefit partially from the currently low valuation at GBE.
Another positive sign at GBE is the very significant and recent insider buying. There have been multiple insider buying transactions in 2010 with some single transactions for 20,000, 25,000, 45,000 and even 100,000 shares. Aside from these recent purchases, a number of insiders already held a very large amount of shares.
Commercial real estate is cyclical and at this point in the cycle, GBE shares offer an attractive risk/reward ratio. In 2004 GBE shares traded around $1 and went over $14 in the next couple years. I don't think GBE will be $14 anytime soon but even a fraction of that leaves lots of room to profit when the shares trade for only about $1 now.
Disclosure: Author is long GBE