Credit Suisse Upgrades Realogy To Neutral Following 'Sharp Pullback'

• Realogy Holdings Corp RLGY shares declined steadily over the past six months, and have lost 28 percent since July 6.
• Credit Suisse’s Michael Dahl upgraded the rating for the company from Underperform to Neutral, while reducing the price target from $39 to $36.
• The recent decline in the company’s shares make the risk/reward more balanced, Dahl stated.

The prior Underperform rating for Realogy reflected downside risk from lackluster growth in the core market and expense pressures, analyst Michael Dahl said. These have “largely played out,” making the risk/reward more balanced, although there are continued concerns surrounding demand trends in 4Q and 2016.

Realogy could record sales and EBITDA below the consensus expectations, with home price appreciation likely to moderate and volume trends lag in core markets, while the company also faces margin pressure from elevated agent commission splits and investments, Dahl commented.

The adj. EBITDA estimates for 4Q and 2016 have been reduced from $172 mln to $170 mln and from $902 mln to $878 mln, respectively. The EPS estimate for 2016 has been lowered from $1.74 to $1.63.

The analyst mentioned that Realogy is likely to generate strong FCF over the next couple of years, “based on the ongoing albeit choppy improvement in existing housing, the key driver of Realogy’s business, and its strong presence in residential brokerage and franchising.” He added, however, that this is already reflected in the company’s current valuation.

While consensus still appears high, Realogy’s valuation “is now embedding expectations closer to our own following the recent pullback,” Dahl wrote.