CBRE Stock Study (3-27-23)

I recently did a stock study on CBRE Group, Inc. (CBRE) with a closing price of $68.86.

Value Line writes:

     > CBRE Group, Inc. is a worldwide commercial real estate firm,
     > offering services to occupiers, owners, lenders, and investors
     > in the office, retail, industrial, and multi-family segments
     > of the market. Provides facilities management, leasing,
     > property, sales, mortgage origination, investment management,
     > and valuation services.

This large-sized company has grown sales and earnings at annualized rates of 17.8% and 18%, respectively, for the last 10 years. Lines are mostly up, straight, and parallel except for sales in ’20 and EPS in both ’20 and ’22. PTPM has trended slightly lower over the last 10 years while slightly edging out peer and industry averages. Its last-5-year average is 6.1%.

Aside from a downside outlier in ’20 (11.4%), ROE has remained between 17-23% over the last 10 years while beating peer and industry averages; last-5-year average is 19.2%. Debt-to-Capital has generally trended lower over the last decade from 56.8% in ’13 to 30.8% in ’22 while tracking higher than peer and industry averages; last-5-year average is 35.6%. Per Value Line, Interest Coverage is 25 and Financial Strength gets a rating of A. M* assigns a Standard rating for Capital Allocation.

I forecast long-term annualized sales growth of 3% based on the following:

• CNN Business projects 4.2% YOY and 5.7% per year for ’23 and ’22-’24, respectively (based on 8 analysts).
• YF projects YOY 4.1% and 7.1% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY growth of 4% and 7.7% for ’23 and ’24, respectively (3).
• Value Line projects 3.9% annualized growth from ’21-’27.
• CFRA projects 2.3% YOY and 4.9% for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 4.2% per year along with its own analyst estimate of 4.9% annualized for the next 10 years.

I am forecasting below the range.

I forecast long-term annualized EPS growth of 4% based on the following:

• CNN Business reports ACE of a 10.2% contraction and 2.9% growth per year for ’23 and ’22-’24, respectively (based on 8 analysts), along with 5-year annualized growth of 11%.
• MarketWatch projects annualized growth of 4.6% and 7% for ’22-’24 and ’22-’25, respectively (11 analysts).
• Nasdaq.com projects annualized growth of 18.4% and 17.7% for ’23-’25 and ’23-’26, respectively [4, 3, and 1 analyst(s) for ’23, ’25, and ’26].
• YF projects YOY 12.1% contraction and 16.6% growth for ’23 and ’24, respectively (9), along with 11% annualized growth for the next five years.
• Zacks projects YOY 12.1% contraction and 20.6% growth for ’23 and ’24, respectively (4).
• Value Line projects 3.2% annualized growth from ’22-’27.
• CFRA projects 11.3% YOY contraction and 0.1% growth per year for ’23 and ’22-’24, respectively, along with 3-year projected CAGR of 1%.
• Morningstar offers a long-term growth estimate of 12% per year.

I am forecasting near the bottom of the four-long-term-estimate range (mean 9.3%).

My Forecast High P/E is 18. Excluding the upside outlier in ’20 (30.5), high P/E has gone from 28.3 in ’13 to 16.3 in ’18 and ’19 before rebounding to 25.9 in ’22 with a last-5-year average (excluding ’20) of 19.7. I am forecasting near the low end of the range (only ’18 and ’19 are lower).

My Forecast Low P/E is 12. Low P/E has gone from 21 in ’13 to 10 in ’19 before rebounding to 15.5 in ’22. The last-5-year average is 12.3. My forecast is lower than all but ’19 and ’21 (10.9).

My Low Stock Price Forecast is the default value of $51.20. This is 25.6% less than the previous closing price and 12.8% less than the ’21 low.

These inputs land CBRE in the HOLD zone with an U/D ratio of 1.4. The Total Annualized Return (TAR) is 6.4%.

PAR (using Forecast Average, not High, P/E) is 2.6%. This is too low for me to invest.

To assess margin of safety (MOS) in this study, I like to compare inputs with those of Member Sentiment (MS). Based on 73 studies over the past 90 days (mine excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.2%, 9.2%, 20.7 and 13.4, respectively. I am lower across the board—especially on growth rates. MS high and low EPS are $7.45 and $3.91, respectively, compared to my $5.22 and $4.27. My low EPS may be greater due to a the latest quarterly earnings release, but my high EPS is less than MS due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $50.38, which is close to mine. Overall, I think the MOS in this study is robust.

When I last studied this stock on 1/22/23, I called for a 10% discount to $76 as a buy point. My inputs went from 5%, 5%, 16, and 10 in January to 3%, 4%, 18, and 12 now. Despite getting that 10% selloff, I am still looking for another 10% discount to reach my BUY zone under $61.90/share.

While this may seem puzzling, I want to spend today’s extra time discussing study pliability. As an example consider the Value Line long-term estimate in the left-margin table [I don’t use this because I feel it’s watered down with too much actual data]: 8.5% growth between ’19-’21 and ’26-’28. The statistical array says ’20 and ’26-’28 correspond to $3.27 EPS/share and $6.50, respectively: 10.3% annualized growth. If I use the mean of ’19, ’20, and ’21 ($4.26 EPS/share) for ’20, then I get 6.2% annualized growth. That 8.5% is in the middle of 6.2% and 10.3%, yet I can’t pinpoint exactly where it comes from.

In generating my growth forecasts, I like to estimate conservatively near the lower end or just below the range altogether. I just illustrated how two legitimate approaches to calculation result in estimates ~4% apart. Were that the lower threshold, my forecast could vary by that amount.

In calculating growth rates from analyst estimates, I like to anchor the range with an actual result to reduce uncertainty. I therefore start with the column to the left of Value Line’s bold font. For the current CBRE report, this is [inexplicably] ’21 [CBRE has an estimate earnings date (per Nasdaq.com) of 5/2/23, which suggests the final 2022 earnings announcement was around 2/2/23 or two weeks before the report date. That should be enough time to be included here!]. I think of the ’26-’28 column as ’27 [technically it could be ’26 or ’28, which adds more potential variance to the mix]. My preferred forecast is therefore $5.80 to $6.50 over six years for a 1.9% annualized growth rate.

Again, moving the starting point forward demonstrates the aforementioned pliability. Given a completed ’22, the calculation is $5.55 to $6.50 over five years for a 3.2% growth rate. Going from ’23 to ’26-’28 would be $5.05 (projected) to $6.50 over four years or a 6.5% growth rate. None of these are that left-margin-table 8.5% and once again, we see how changing the starting year can result in variation over 4%.

Despite the pliability, my conservative approach brings me comfort. Basing my forecast on the mean (in the middle rather than at the low end of the range) estimate would increase stability if I were willing to sacrifice MOS. I prefer the latter.