August 7, 2008

new position added

I have purchase CB Richard Ellis (CBG) two days ago at $13.50 per share. I will post a complete write up on this opportunity, but highlight for my purchase:

  1. Premier real estate service company in the world.
  2. Commercial real estate fundamentals are deteriorating but will crash as many expect and therefore many real estate operation prices are selling at steep discount to net asset value.
  3. the outsourcing segment, which have recurring revenue and is not affected by occupancy as maintenance has to performed on a building if it is empty or not, valuation alone equals to market cap of CBG and you get other segments for free.
  4. The company has an international network of services in growing markets.
  5. Top skilled management that can navigate difficult market conditions.
  6. Commercial real estate prices do not affect their results as much as lack of transactions. Transactions over the last 6 months have been almost non existent but that is a temporary event that can reverse quickly.

The valuation of CBG has gotten really attractive after their earnings release, which has declined by some 80%. The company represent good value at these levels for the long term holding.


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Anonymous said...

I think CBG's business model relies too much on transaction revenue and lacks recurring revenue. I would rather invest in rating agencies such as Moody which held much better than CBG in this downturn, yet it has good upside once credit market returns. In the longer term, CBG probabaly deserves a lower P/E due to negative operating leverage compare to rating agency. CBG went BK in the past, I think if one has to play credit market, moody is a much better choice than CBG. Moody is also a dominant player with broad international reach, yet its business model are better than CBG. You suffer less in a downturn but get same upside in a good market. CBG relies on acquisitions to grow, which causes concern that they may overpay in boom time. They also have credit risk.

I'm not saying CBG is a bad investment here, just there are better choices than CBG. Business model really drives long term return and I think CBG's business model deserves a low valuation. They went under before and it may happen again in the future.

Sami said...

actually with the acquisition of Trammell Crow 33% of its revenue is recurring. and in this environment more and more company are outsourcing maintenance and operation of real estate, and CBG has economies of scale to do that. high vacancy rates or not property maintenance has to be done on office buildings and I do not think that the current environment will affect Trammell Crow business at all.

yes margins are thin and the company hoping to increasing them, how successful they will be I am not sure. Property maint business is very thin margin business and you need a large volume to leverage your back office and admin operations.

My valuation of the company has the current market cap to equal only the Trammell Crow portion of the business. The rest of the brokerage and asset management are free.

Latest quarters have been hurt due to lack of transactions but I suspect transaction will be abound credit crunch or not in the next few quarters. owners have to sell when they can't finance and that will be positive for CBG.

Also a chunk of their revenue coming from international places where commercial properties are healthy.