Elevator Pitch
I rate Newmark Group, Inc. (NASDAQ:NMRK) stock as a Buy now.
With my prior February 6, 2023 write-up, I highlighted that NMRK’s shares were “cheap for valid reasons.” But I have chosen to upgrade my rating for Newmark Group from a Hold earlier to a Buy now, as I have identified key catalysts that could drive a positive re-rating of NMRK’s share price and valuations.
Share Repurchases
At the company’s earlier Q1 2023 earnings briefing on May 10 this year, Newmark Group stressed that “the outlook on today’s call assumes no additional share repurchases.” As such, it is fair to say that the market hasn’t factored in any potential share buybacks for the current fiscal year when pricing NMRK’s stock.
In my opinion, there is a reasonably good chance of NMRK initiating share repurchases later this year, and this could become a significant catalyst for Newmark Group.
One factor to consider is Newmark Group’s recent share price performance and its current valuations.
Since I published my earlier article on NMRK, the company’s share price has fallen by -19.4% as per Seeking Alpha’s price data. The market is now valuing Newmark Group at consensus forward next twelve months’ price-to-sales and normalized P/E multiples of 0.47 times and 6.2 times, respectively based on S&P Capital IQ valuation data. As a comparison, NMRK’s all-time historical average price-to-sales and normalized P/E metrics were higher at 0.77 times and 6.8 times, respectively. It will be realistic to expect that Newmark Group will have a re-think about repurchasing its own shares, considering the stock’s current valuations which make buybacks value-accretive.
Another factor that influences NMRK’s stance on future share buybacks is the company’s capital allocation priorities. Piper Sandler published a research report (not publicly available) titled “transaction Market Key Catalyst for CRE Rebound” on June 15, 2023 which cited takeaways from Newmark Group’s “meetings with institutional investors” last month. In the Piper Sandler report, it was noted that NMRK “will likely return to stock buybacks” when “this year’s debt is addressed” based on management commentary.
As indicated in Newmark Group’s Q1 2023 results presentation slides, NMRK has senior notes amounting to slightly over half a billion dollars maturing on November 15 this year. NMRK is likely to redeem and refinance these senior notes and then begin buying back shares, as per the company’s management comments at a meeting organized by Piper Sandler.
Also, Newmark Group’s financial position is pretty strong now, so it is unlikely that NMRK will have to engage in substantial deleveraging before embarking on share repurchases. As of March 31, 2023, NMRK’s trailing twelve months’ net debt-to-EBITDA ratio was very healthy at 1.3 times. Also, the company’s EBITDA-to-interest cost on a trailing twelve months’ basis was a comfortable 10.7 times.
Countercyclical Investments
It is clear that the commercial real estate market is in a downcycle right now. Newmark Group has seen its revenue and normalized EBITDA contract by -23.2% YoY and -50.3% YoY, respectively in the first quarter of the current year.
The majority of companies usually choose to cut costs and pull back on their investments when the industry they operate in is in a downturn. But the best time to invest is usually when the chips are down. Newmark Group is making a significant amount of countercyclical investments now, and I expect this brave move to pay dividends for NMRK in the medium to long term.
Newmark Group disclosed at its most recent quarterly results call that it had “made significant investments for future growth” in the first quarter of this year, which it estimates will “add approximately $300 million of annualized revenues” going forward. Based on data sourced from S&P Capital IQ, NMRK’s cash outflow from investing activities rose meaningfully from $22.5 million in Q3 2022 and $22.2 million in Q4 2022 to $118 million for Q1 2023.
A key investment for NMRK in 2023 year-to-date is the purchase of “London-based real estate advisory firm, Gerald Eve LLP” as announced in its March 10, 2023 press release. While Newmark didn’t disclose the amount it had paid to buy over Gerald Eve, it is very likely that the acquisition price for Gerald Eve would have been lower than what the company would have fetched in a better economy and healthier commercial property market.
More importantly, the acquisition of Gerald Eve doesn’t just increase Newmark Group’s total sales, as NMRK’s quality of revenue is expected to improve with this recent M&A deal. Newmark Group had emphasized at its first quarter earnings call that “more than a majority of” Gerald Eve’s revenue comprises of “recurring management services”, as opposed to one-off transactional revenue streams. Moreover, Gerald Eve delivered approximately $114 million of revenue from its home market, the UK, in fiscal 2022, so the addition of Gerald Eve helps to lower Newmark Group’s revenue concentration in the US (representing 93% of FY 2022 top line).
When the commercial real estate market eventually recovers, investors will naturally turn their attention to listed companies which have been preparing for the upturn, and I expect Newmark Group to be one of the names that catches investors’ attention.
Concluding Thoughts
I have found catalysts which might ignite a recovery in Newmark Group’s stock price going forward. In my view, share buybacks and countercyclical investments that enhance shareholder value are what the market needs to get excited about NMRK’s shares again. As such, I decide to raise my rating for Newmark Group to a Buy.
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