* All data are as of the close of Friday, December 5, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
What in the world is going on with the Property Management industry? Just one of the biggest housing boom spill-overs in U.S. history, that's all.
What do I mean by "spill-over"? Since the end of the housing market's implosion in 2009, while the U.S. has been enjoying one of the grandest housing buying and building booms in its history, a whole host of other housing-related industries have tagged along for the ride, with little mini-booms spilling-over into all those other spaces like flood waters spilling into neighboring towns.
One of those housing-related beneficiaries has been the Property Management industry. In a simple definition:
"Property management companies invest in and own residential and commercial real estate properties, and also make long-term commercial mortgage loans. Property management companies are usually structured as REITs, limited partnerships, or corporations. As REITs and MLPs are mandated to pay out the large majority of their earnings, property management companies generally have much higher-than-average dividend yields."
The nation's three largest Property Management industry companies - CBRE Group, Inc. (NYSE: CBG), Jones Lang LaSalle Incorporated (NYSE: JLL), and CoStar Group Inc. (NASDAQ: CSGP) - are NOT registered as Real Estate Investment Trusts (REITs) nor as Master Limited Partnerships (NYSEARCA:MLPS), and are thus not obliged to pay out such high dividends. But they certainly have made up for it in a much better way - with astronomical stock appreciation as graphed below.
Since the economic recovery began in early 2009, where the broader market S&P 500 index [black] has gained 205% and the SPDR Financial Sector ETF (NYSE: XLF) [blue] which the industry belongs to has gained a stellar 295%, CBG [beige] has risen a spectacular 1,120%, while JLL has gained 750%, and CSGP has risen 590%.
On an annualized basis, where the S&P has averaged 36.18% and XLF has averaged 52.06%, CSGP has averaged 104.12%, JLL has averaged 132.35%, and CBG has averaged 197.65% per year!
Looking forward, the Property Management industry looks pretty wobbly, swinging from good performance, to great, to dismal, back to ok again, as tabled below where green indicates outperformance while yellow denotes underperformance.
The turbulence over the near term is likely due to the threat of rising interest rates, which will put a dent in the housing market at first, and as a consequent, hurt the revenues of housing consultants and support services providers like the Property Management industry.
Thus, over the immediate term, where the industry's earnings are expected to outgrow the broader market's average growth rate at a tepid rate of 1.29 times, while next quarter's growth should soar to 6.49 times, earnings growth is expected to shrink in 2015 when interest rate hikes are expected to begin.
But it shouldn't take more than a year or so for the housing market to adjust to higher rates, which will rise only gradually anyway. As such, the industry's earnings are once again seen outgrowing the S&P's average earnings at a rate of 1.58 times annually over the next five years.
Zooming-in a little closer, the three largest U.S. companies in the industry are expected to split perform, as tabled below.
Over the immediate term, all three are expected under-grow the broader market's earnings, with CBG growing the least. Yet JLL is seen bucking the trend next quarter with a growth rate 2.42 times the S&P's.
2015 will hit all three as it will their industry, though not as hard, with CBG outperforming this time where once it lagged.
Over the longer term, however, things look homey and warm for all three once again, with earnings growth ranging from 1.45 to 2.07 times the broader market's.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, CSGP housed the greatest revenue growth year-over-year, while JLL sheltered the greatest earnings growth, and by an exceptional degree. At the low end of the scale, JLL and CBG split the worst growth between them.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, CSGP operated with the widest profit and operating margins, while CBG and JLL contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, CBG's management team delivered the greatest returns on assets and equity, where CSGP's team delivered the least.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, JLL provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while CSGP's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, JLL's stock is cheapest relative to forward earnings, company book value, and 5-year PEG. At the overpriced end of the spectrum, CSGP's is the most overvalued relative to earnings and PEG, while CBG's is the most overpriced relative to book.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, JLL offers the highest percentages of earnings over current stock price for the current quarter and 2015, while CBG offers it next quarter. At the low end of the scale, CSGP offers the lowest percentages overall.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, where JLL offers the greatest earnings growth this quarter and next, CBG offers it in 2015, while CSGP offers it over the next five years.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe JLL's stock offers the least upside potential and greatest downside risk, while CSGP's stock offers the greatest upside and CBG's offers the least downside.
It must be noted, however, that both CBG's and CSGP's stocks are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, CBG is best recommended with 2 strong buys and 4 buys representing a combined 100% of its 6 analysts, followed by CSGP with 4 strong buy and 6 buy ratings representing 90.91% of its 11 analysts, and lastly by JLL with 2 strong buy and 4 buy recommendations representing 85.71% of its 7 analysts - all garnering very high recommendations.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… JLL with a cozy little layout, outperforming in 13 metrics and underperforming in 11 for a net score of +2, followed not far behind by CBG, outperforming in 7 metrics and underperforming in 8 for a net score of -1, with CSGP right next door, outperforming in 11 metrics and underperforming in 13 for a net score of -2.
Where the Property Management industry is expected to outperform the S&P broader market moderately this quarter and substantially next quarter, underperform significantly in 2015, and outperform meaningfully beyond, the three largest U.S. companies in the space are expected to split perform near term, with JLL providing the greatest growth. Yet all three eventually beat the market's growth rate longer term, with CSGP leading the way home.
Yet after taking all company fundamentals into account, Jones Lang LaSalle Incorporated provides investors with the most inviting financial structure, given its lowest stock price ratios, highest revenue over market cap, highest diluted earnings over current stock price, highest trailing earnings growth, highest future earnings over current stock price overall, highest future earnings growth overall, and highest dividend - comfortably winning the Property Management industry competition.