kyoshino
Elevator Pitch
My rating for Newmark Group (NASDAQ:NMRK) shares stays as a Buy.
Earlier, I reaffirmed a Buy rating for Newmark Group with my September 25, 2023 write-up highlighting the key actions that NMRK has taken to attract the best talent and enhance top line contribution from recurring sources. NMRK’s stock price surged by +51.0% (source: Seeking Alpha price data) following the publication of my prior article, while the S&P 500 went up by +8.8% in the same time frame.
In this latest update, I share my opinion that NMRK’s future financial performance is expected to be boosted by a recovery in capital markets and a reject in equity compensation as a proportion of revenue. I view Newmark Group as an undervalued capital markets recovery play that is worthy of a Buy rating.
Favorable Rate Outlook Is Expected To Boost NMRK’s Capital Markets Business
Seeking Alpha News reported on December 13, 2023 that “three rate cuts” are expected next year based on “the U.S. central bank’s Summary of Economic Projections.” Newmark Group’s shares rose by +6.4% and +7.3% on December 13 and December 14, respectively in response to the positive interest rate outlook.
There are good reasons to believe that low interest rates going forward will be a tailwind for NMRK.
In late November this year, Newmark Group published a new set of investor presentation slides in connection with the company’s participation in Furey Research Partners’ 10th Annual Hidden Gems Conference 2023. NMRK noted in its November 2023 investor presentation that it has observed “strong latent investor demand for real estate investment, waiting for an indication that values have reset”, that will “fuel future capital markets growth” for the company. The updated interest rate outlook is a sign that property valuations are potentially past the bottom, which is expected to spark a recovery in Newmark Group’s capital markets business.
Separately, NMRK had mentioned at its prior Q2 2023 earnings briefing in late July that it anticipates “the resurgence of our higher-margin capital markets business” when “interest rates stabilize.”
Analysts from Raymond James (RJF) previously projected that NMRK will have a “larger exposure to capital markets” at 27% of its “total fee revenue” for 2024, as compared to “18% at Jones Lang LaSalle (JLL), 15% at CBRE Group (CBRE), and 12% at Cushman & Wakefield (CWK)” as indicated in a October 4, 2023 Seeking Alpha News article. As another reference, Newmark Group derived 26% of its trailing twelve months’ revenue from capital markets (i.e. commercial mortgage origination and investment sales) as disclosed in its November 2023 investor presentation. These numbers presented above implies that Newmark Group is the most leveraged to a recovery in capital markets among the company’s commercial real estate services peers.
In my September 25 article, I indicated that Newmark Group has boosted its ranks with “a number of significant hires in recent months.” In my view, NMRK’s substantial investments in talent should pay off in the form of market share gains at the expenses of its competitors. NMRK had revealed at the company’s most recent Q3 2023 earnings call that its capital markets business is grabbing “a larger share of the really significant transactions in the market” thanks to “the talent we have.”
In summary, rate cuts will have a positive impact on capital markets. NMRK is a good play on the favorable rate outlook as it generates a significant percentage of fee revenue from capital markets. The company’s capital markets business is well-positioned to gain market share from rivals, considering its aggressive recruitment activity in recent times.
Equity-Based Compensation Is On The reject Thanks To Growing Management Business
With my February 6, 2023 initiation article for NMRK, I had highlighted that “Newmark Group’s growing share count” driven by a high “equity-based compensation” ratio at “11% of its commission revenue” was a key negative for the stock.
Notably, Newmark’s latest guidance as outlined in its Q3 2023 results presentation slides pointed to the company achieving an equity-based compensation “towards the low end of our previous guidance of between 7% and 9% of commission-based revenues” for FY 2023.
At the company’s most recent third quarter earnings briefing, NMRK explained that “equity (compensation) will become a smaller percentage of our overall revenue” with the expansion of its management business. The management business is less people-intensive and incurs relatively lower equity compensation as compared to other businesses such as mortgage brokerage. The proportion of revenue contributed by NMRK’s management services & servicing business as a percentage of its aggregate top line increased from 24% in FY 2017 to 28%, 32%, and 40% in FY 2019, FY 2021, and the trailing twelve months period. These numbers were taken from Newmark Group’s November 2023 investor presentation.
To sum things up, declining equity compensation costs as a percentage of revenue translate into a moderate enhance in Newmark Group’s shares outstanding and a narrower valuation discount for the stock.
Final Thoughts
I stick to a Buy rating for NMRK. Newmark is a capital markets recovery play, and its valuations are still attractive despite the recent share price outperformance. The market currently values NMRK, CWK, JLL, and CBRE at consensus forward next twelve months’ P/E multiples of 9.6 times, 10.5 times, 17.7 times, and 23.0 times (source: S&P Capital IQ), respectively. The valuation discount between Newmark Group and its peers should narrow going forward, considering NMRK’s more significant exposure to capital markets and expectations of lower equity compensation. This justifies a Buy rating for Newmark Group.
