CoStar Group (CSGP) is the industry leader in commercial real estate data and analytics. It provides a data and analytics package used by practically everyone (brokers, landlords, appraisers, investors, etc.) in the commercial real estate industry.
CoStar provides marketing information on buildings available for lease and for sale as well as a large database of comps, many of which have been well researched, as well as many other useful features. I don't think there is a single, serious U.S. CRE professional that is not a subscriber. And therein lies the problem. CoStar is priced for tremendous growth - so much so that investors cannot possibly not be disappointed.
Historic revenues are as follows for the past five years
Below are estimated and actual EPS.
With a market cap of $1.2 B and a share price of $57, trailing P/E is 90x and forward P/E is 54x on consensus expected EPS growth of 70%. To be fair to CoStar, earnings have been depressed in part recently because it has been relocating its headquarters to Washington, DC.
CoStar's biggest problem in my mind is that it has been too successful. Everyone in commercial real estate uses it. Therefore, I find its growth prospects to be questionable. Right now a main driver in CoStar's revenue growth has been banks looking to assess their value of their REO portfolios. Once this backlog is sold, it is highly unlikely that these customers will renew.
For fun, I did a back of the envelope reasonableness check. Not that I necessarily agree with the analysts but suppose I give them the benefit of the doubt about 2011 EPS, as after all it is in line with historical performance. Now suppose that over a ten year period, EPS grows by 20% per year, every year. EPS in year 10 would then be a healthy $5.52. Smack on a 20x P/E and a very aggressive 10% discount rate and the present value implies a share price of $42.57!
Perhaps this is why CSGP has seen a spate of insider selling recently. Not but two weeks ago Andrew Florance, CEO, sold over $1 MM worth of shares at $55 per share. A month before that John Stanfill, SVP of Sales and Customer Service, sold $25 MM worth of shares at $50 per share. I could go on but I don't feel the need to.
Growth numbers like what investors anticipate invite competition and although CoStar has barriers to entry with its well established relationships with brokers and database of researched comps, its moat should not be viewed as impenetrable by any means.
Right now, CoStar is priced for perfection, and I believe that if disappointing earnings come out, this illusion will be shattered and investors may be burned. I don't necessarily recommend going out and placing a short position on CSGP, because investor enthusiasm clearly still exists. But once the near-term run-up stock prices wears off, CSGP will be very vulnerable. Invest wisely.