Goldman Sachs Expands Commercial Real Estate Broker Coverage, Says CBRE, Newmark Are Names To Own

Goldman Sachs recommends equal-weighting the commercial real estate broker sector versus the S&P 500 and REITs, and cited secular trends supporting the sector, tough comps in debt placement by 2019, strong earnings execution, and valuation as the reasons why in a Tuesday report. 

The Analyst

Analyst Andrew Rosivach initiated coverage of the following commercial real estate broker stocks:

• CBRE Group Inc CBRE: Buy/$54 price target.
• Jones Lang LaSalle Inc JLL: Neutral.
• HFF, Inc. HF: Sell/$41 price target.
• Goldman Sachs reiterated a Buy rating on the shares of Newmark Group Inc NMRK with a price target that was lowered from $24 to $18.

Newmark Has Best 2-Year Growth

Of the commercial real estate brokers, Newmark has the best two-year growth rate, at 20 percent versus a peer group average of 9 percent, Rosivach said in the Tuesday note. (See the analyst's track record here.) 

This is despite the shares trading at the lowest 2019 P/E multiple, the analyst said.

The strong growth estimate can be attributed to a combination of greenfield opportunity and the use of Nasdaq share sales as a funding source, Rosivach said. 

The lowered price target for the stock incorporates a four-times discount to the S&P 500 due to the company's shareholding structure and the need to build a track record before beginning to trade at a broker sector average multiple, according to Goldman Sachs. 

Business Mix, Balance Sheet Make CBRE More Defensive

Goldman predicated its Buy rating for CBRE stock on a two-year annual growth rate of 11 percent, the second highest in its brokerage universe, and the company being overweighted to the services business.

With CBRE expected to hold close to no debt by the end of 2019, Rosivach said the stock is likely to be more defensive if the market experiences a downturn.

HFF Valuation Fully Reflects Strengths

A "business model of a partnership culture and owner mentality" has helped HF to grow earnings per share by 15 percent since 2013, Rosivach said. The company's net cash position provides financial flexibility during downturns, the analyst said. 

"However, we believe HF valuation fully reflects these strengths, with its relative multiple to the S&P 500 0.7x above its seven-year historical average," the analyst said.

HFF's capital market focus poses the risk of peak multiples on peak earnings, Rosivach said. The company's special dividend, which once contributed substantially to total returns, now provides a smaller return due to stock price appreciation, he said. 

The Price Action

CBRE is up 33.54 percent over the last year. Jones Lang LaSalle is up 53.65 percent during the same time frame, while HFF climbed 79.26 percent. 

Newmark shares, which debuted on Wall Street Dec. 15, 2017, have gained about 8.53 percent since then.

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