Raymond James Downgrades FirstService, Cites Valuation And Outperformance

Raymond James analyst Frederic Bastein believes FirstService Corp FSV was involved in a period of strong outperformance, which has compelled the analyst to downgrade the shares of the company to Market Perform from Outperform. He also cited valuation as a reason for downgrading the stock. However, the brokerage has kept the price target of $64.00.

Bastien pointed out that FirstService Stock was up 42 percent since February's fourth quarter 2015 earnings release. He said this not only compared favorably to a 14 percent gain for the broader S&P 500 index over the same period, but also comfortably outpaces the 10 percent return posted by FirstService's closest comps. As a result the stock's premium, on a current EV/EBITDA basis, has expanded to 4.1 multiple points from 1.9.

Related Link: FirstService Residential Hosts Training Session Focused On Developing Leaders

Further Justification

The analyst said, "Although we feel that FirstService's position as primary consolidator of property management and service businesses across North America justifies its premium, we have difficulty envisioning how this valuation gap can widen further in the short term."

However, Bastein believes FirstService Residential could still tap several sources for growth, as there are also some areas where the company could scale up. For instance, regions like Chicago could gain from M&A. Similarly, the brokerage believes regional gaps could be filled by adding Boston, Denver and the Pacific Northwest to FirstService Residential's scope.

Bastein added, "It is also conceivable the firm will have expanded globally by 2020, but for now steep valuation expectations are keeping it at bay from markets such as the UK, France, Brazil and the UAE."

Valuation Concerns

As far as valuation, Bastein said it was off an EV/EBITDA multiple of 13.0x its 2017 estimates, which is within the FirstService's trading range since its split from Colliers International.

The stock was trading 0.7 percent down at time of writing.