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CBRE Group, Inc. Message Board

  • cordellhardy cordellhardy Jul 29, 2009 6:26 PM Flag

    Q2 2009 Results

    Good to see CBG stablizing their business and preparing for the future by raising liquidity levels and reducing some of their debt. It is unfortunate that they are implicity projecting longer-term decreases in revenue and income, downsizing their facilities and adopting a lower cost structure. This is now the second quarter in a row with a reported loss by GAAP principles, and even if allowing non-GAAP measures, earnings of $10 million on 268 million shares is disappointing relative to past performance. It will be hard for CBG to earn $50M GAAP this year, given 2 quarters remaining and a loss to date of about $40M. But let's assume that this is a good estimate for argument's sake in 2009.

    There is also some reason for concern on their improving balance sheet, with their listed goodwill increasing (??!) vs. Q1 2009 from $1.55B to $1.59B, during which time they've made no acquisitions I know of. The shareholder equity is only $486M, which means if you discount the value of goodwill shareholder tangible equity is -$1.1B. Assuming CBG earns $100M next year and $200M the next five years after that, it will take 6 years just to get to the point of zero tangible equity. Moreover, at a valuation of $2.6B today, the company is trading at about 50x current year's earnings and 26x next year's earnings assuming the projections above.

    As there are other stocks with more compelling balance sheets, earnings and valuations out there, it would seem there is minimal upside to CBG shares in the medium-term. Hopefully for the longs here I am wrong...still holding short shares for a better cover price.

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    • the balance sheet maybe similar, the overall environment however is not. different day, different ball game.

    • if CBG bought GBE, they'd have to buy the stock (as noted, maybe $40 million market cap) plus assume the debt of GBE. i doubt CBG's lenders would allow this to happen. paying out $40 million and adding debt is not what CBG needs right now.

      i'm not totally in tune with these broker companies but i think these are more likely to merge/acquire during good times rather than bad times. in the past, i think several have gone private in bad times and then gone public again when times are good. i remember Eastdil (owned by wells fargo) bought Secured Capital a couple years ago during the go go days. and i think CBG bought Insignia sometime before that but not positive.

    • That is a good point to bring up regarding purchasing GBE. However, there is very little value at all in the GBE franchise or name. I understand most brokers are loosely tied to GBE, and could very easily operate under their original company names. Grubb & Ellis is more of a loose affiliation of various professionals and companies, as various unrelated businesses were purchased over many years. They have never achieved a great deal of synergy.

      There are some talented individuals with the Grubb & Ellis system. But, it would probably be much more straight forward for CBRE to approach those relatively successful few broker/individuals to see if they would fit with CBRE - as many already have.

      I would look for Grubb & Ellis to collapse one of these years, and their professionals to continue their individual businesses under different names. It seems like they have been on life support for a decade.

    • For $30 to $40 million, does CBG buy GBE, keep the corporate accounts and property management, maybe a few good brokers and throw away the rest? Or does CBG just stand by and watch GBE wither away?

    • Thanks for your response, blue. Looking forward to watching this company and seeing how our perspectives play out in our long/short positions. It is clear that there is strong buying interest in the recent weeks, whatever the reason.

    • cordell,

      as far as EBITDA goes, it is widely used in the financial world. it is true that "real" cash flow is more complex, taking into account a/r, a/p, inventories, etc... often a company will have a working capital line of credit that will cover these other items (like maybe someone is paying them slow so they have to borrow to pay payables while they wait to collect some receivables). sometimes there is a portion of the working capital line that can be used for cap ex.

      for companies with no real assets, like CBG, EBITDA is used to calculate leverage. in fact, you might check some recent press releases on the changes to CBG's bank loan. i'm pretty sure there were several references to the loan covenants (which use EBITDA). definitely one for interest coverage.

      when buyout firms look to acquire companies, they will often look at it as a multiple of EBITDA. if the company has $100 million in EBITDA, they might consider paying 5x to 7x that amount. this is used every day to value companies.

      your original post focused on tangible book equity and GAAP earnings. in this case tangible book equity is negative which implies the company has no value. but it does have value so what does that tell you about tangible book equity in terms of understanding CBG ? GAAP earnings are nice but include non cash charges (i think as much as $100 million for CBG) and sometimes one time stuff that can skew earnings to the good or the bad.

      for CBG the analysis is real easy. here's an example looking at year end of 2007. roughly speaking, receivables cover payables (each at about $1.5bn) and all the other balance sheet stuff is meaningless except debt, 700k short and 2.0bn long, or 2.7bn total. on the EBITDA side you have income of 390 plus 120 (depr) plus 160 (interest) plus 190 (taxes). that makes about $800 million in EBITDA.

      so debt/EBITDA was only 3.3x, not too high on the leverage spectrum. but now, the debt is the same and EBITDA is probably trending around $250 million for this year, so now we are looking at 10x leverage. i think once you are north of 5x, you are considered "highly leveraged".

      the lenders are hanging in there on this deal because they believe EBITDA will increase in the next two years and their really, really bad deal right now will look much better then. and i think they are right.

    • Makes sense...thanks for the explanation.

    • For me their balance sheet to a certain degree looks similar to one in 2004/early 2005. Scary, but they certainly did not collapse at that time. Historically their goodwill does fluctuate. It's possible that some part of it is recorded in non-US funds (Europe, Asia subs) and upon consolidation they translate it into $US @ current currency exchange rate.

    • So would you think that JLL is in better shape than CBE?

    • :O) Thx for the love, crazy! Off topic, but my dad wasn't around much when I was growing up (surprise, right? I read somewhere that like 80% of African-American kids grow up without a dad in the house.) Causes lots of issues. Thankfully, I found a great daddy in God as I grew older. This has made all the difference...

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