Lately strong employment numbers have caused market economists to worry about inflation federal reserve policy. These same employment statistics are music to the ears of CB Richard Ellis (NYSE:CBG). The company is a commercial real estate operator that leases buildings, manages properties, and provides many different services surrounding this industry.
Recently, the company made a big acquisition, purchasing Trammel Crow in December fro $2.2 billion. While the company is no stranger to mergers, this most recent acquisition is a big step as it opens up many new opportunities for the company to expand its services offered. CBG has estimated that the acquisition will save $65 million in costs by second half of 2007 and during their first quarter release, it announced that these cost savings are ahead of schedule. However, the biggest benefit of merging the two companies revolves around the possibility of cross-selling the new Trammell customers many of the services CBG has already been offering. Trammell boasts many strong blue chip companies such as American Express (NYSE:AXP) and Bank of America (NYSE:BAC), so this adds stability and opportunity to the marriage.
In the past, much of CBG’s business has been on the transaction side. This means when the company assists in the sale of a large property, there is a significant boost to revenue and income. However, this is a non-recurring revenue stream so it is important to keep a pipeline full of these transactions in process. The other side of the business relates to what the company calls “outsourcing business” or managing properties for outside clients. This type of business usually revolves around a long-term contract so the revenue is a recurring stream that is predictable and adds stability to the business. While this management business was only 8% of revenue pre-merger, the addition of Trammell will bump this up to 18% of revenue and give the company opportunity to increase that as it cross sells opportunities to other clients.
Another interesting area of operation for the company is “CBRE Investors,” the money management portion of the business. The company sets up and manages real estate investment programs for clients either managing the accounts separately or setting up limited partnerships to make these investments. While the company is able to charge a fee for its $30 billion under management, it is also eligible to participate in incentive fees if it outperforms certain targets and benchmarks. This can be a very lucrative business and has been a fast growing portion of the company over the last few years.
Looking at the valuation of the stock, I am encouraged by the valuation (18.7x 2007 consensus EPS) especially when taking into account the projected growth in the company. I’m also comfortable with the financial statements as it appears the company is very conservative in the way it accounts for revenue and expenses which gives it a higher earnings quality. The economic picture continues to look stronger than we anticipated at the end of the year and as the company diversifies outside of the US to be a key European and Asian player, the risks associated with the US economy become more manageable.
Disclosure: Author has long position in CBG
CBG 1-yr chart