Brokerage Giant Realogy No Longer A Goldman Sachs Conviction Buy - Here's Why

On August 2, Goldman Sachs analyst Steven Kent published a research note lowering brokerage giant Realogy Holdings

to Neutral, and removing the company from its conviction buy list. Additionally, Kent lowered his Realogy target price by over 17 percent. Goldman's bullish thesis was based upon accelerating existing homes sales (EHS), and a Realogy operating model which the firm believed would deliver relative outperformance in a favorable operating environment. Realogy - Big Picture Realogy owns and franchises some of the largest and most familiar names in residential real estate brokerage.

However, Kent noted "Since RLGY was added to the Buy list on October 6, 2013, it is up 6% vs. the S&P up 24%," and since 2Q15 Realogy results did not "deliver on this thesis," Goldman is "moving on." Tale Of The Tape - Shares Drop On Q2 Results On Friday July 31, Realogy shares plunged 8 percent on disappointing Q2 earnings results, and were down again on Monday, following the Goldman downgrade.

During the past 52-weeks RLGY shares have traded in a range of $32.91 - $49.75 per share, and as of this writing are now trading ~11 percent off of pre-earnings levels. Goldman Sachs - Realogy: Downgraded To Neutral, Lowered PT From $57 To $47 The new Goldman 12-month price target of $47 is "…based 50/50 on 10X EV/EBITDA multiple and DCF with unchanged WACC of 7.8%." Goldman lowered its EV/EBITDA multiple from 11.5x to reflect "lower confidence" that Realogy will be able to deliver strong results moving forward. Goldman's 2015 - 2017 EBITDA estimates were also lowered "…to $820mn/$907mn/$977mn from $835mn/$927mn/$1,001mn." Goldman Sachs - Rationale Kent noted, "What we viewed to be a pure play, easy story has turned more complex with acquisitions, tough comps, and charges offsetting improving existing home sales." Realogy has been unable to translate strong 2Q15 existing home sales into increased earnings.

Despite forecasts of robust EHS in 3Q15, Goldman has lost confidence in the ability for RLGY to outperform, as evidenced by management's "in-line" guidance, in a strong housing environment. Winter Is Coming Goldman economists are forecasting slower growth for EHS during the next two quarters vs the same periods in 2014.

The summer "selling season" is coming to an end, so investors will have to wait another year to see if Realogy is able to turn things around. Goldman Sachs - Investor Takeaway Kent noted, "With housing indicators like pending home sales down 1.8% and new home sales down 6.8% in June, GS economists expect the pace of the increases in EHS to slow over the next two quarters, which will likely hold back interest in RLGY shares."