This Real Estate Service Stock Has Huge Upside

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CoStar Group (NASDAQ: CSGP), the leading commercial real estate information company, created a new 52-week high of $93.30 few days ago. The enthusiasm over commercial property pricing and improved sales boosted the stock price. I feel the company offers a rare investment opportunity in the growing real estate information space.

CoStar provides information and marketing services to the commercial real estate industry in the United States, the United Kingdom, and France. The company has a unique business model that helps real estate brokers to get accurate data and key property analysis that no other company can provide.

CoStar Acquired LoopNet in 2012

The acquisition of LoopNet by CoStar Group for $860 million, a deal that closed in April last year, indicates that there is significant institutional demand and therefore a sustainable value creation opportunity in this sector. The acquisition was a strategic fit based on its massive cross-selling opportunities, new product development, and penetration into new markets. The transaction also provided both revenue and cost synergies for the combined entity. In today’s business environment where information is king, the acquisition may signal the establishment of a data and property listing dynasty that could rule the commercial real estate realm for decades to come.

CoStar has a Unique Business Model

Participants in the commercial real estate industry rely on accurate and timely data. Lenders and appraisers require comparable sales data for underwriting and valuations. Brokers, property managers and building owners require tenant information to track available space and tenant leasing needs.

CoStar's nearly 1,000 researchers develop and update its database of information to support these functions. Its high customer retention rate (averaging 90% historically), coupled with annual rate increases (usually in line with inflation), have led to a solid recurring revenue base that should increase modestly over time.

The number of LoopNet’s registered members surpassed 5 million last year. Its website has around 1.5 million monthly visitors. With its primary focus on property listings, the combined entity enjoys favorable economies of scale in the commercial real estate research and marketing business.

Improved Property Market will Drive the Stock

There are not enough properties right now to meet the needs of the market, reports Bloomberg. When banks pulled back on foreclosures two years ago following a government investigation into allegations of faulty practices, market researchers, academics and Wall Street analysts said that a surge of delinquent properties would deluge the U.S. market once lenders resolved the claims and worked through backlog, driving down prices for years to come.

In fact, the flood failed to materialize, even after the five biggest U.S. mortgage servicers reached a $25 billion mortgage settlement with federal and state regulators in February, 2012. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the real estate market helped boost consumer confidence and the economy.

CoStar Financials

In the past ten quarters, CoStar has beaten analysts’ estimates eight times and matched twice. The company reported its most recent quarter EPS of $0.38. Revenue for the quarter came in at $96 million. 

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CSGP EPS Diluted TTM data by YCharts

The stock is not cheap in terms of conventional valuation metrics. The company has a PE multiple of 236.92x, far above the average diversified services industry PE multiple of 105x. But I feel the company’s tremendous growth prospect warrants such reasonably rich multiples on its stock.

CoStar Group primarily competes with Reis (NASDAQ: REIS) and HomeAway (NASDAQ: AWAY). In terms of revenues CoStar enjoys a leadership position among competitors. However, the company’s high EBITDA multiple can be indicative of its richer valuation. 

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CSGP Revenue Per Share TTM data by YCharts

The Bottom Line

The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, revenue growth, expanding profit margins and solid stock price performance. I feel these strengths far outweigh the fact that the stock enjoys higher than average PE or EBITDA multiple in the sector.

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends HomeAway. The Motley Fool owns shares of HomeAway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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