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CBRE Group: Buy the Pullback

- By Jonathan Poland

Here in the small city of Washington, D.C., commercial real estate developments are everywhere. From the Navy Yard to the Southwest Waterfront to my neighborhood on Capitol Hill, new developments are being constructed. Smaller commercial developers are still turning old homes, churches and schools into condos. The trend is likely to continue as money flows out of stocks and into hard assets.

CBRE Group Inc. (CBRE) is the largest commercial real estate company in the world, generating over $16.1 billion in sales and $823 million in net income during the last 12 months alone. That's up significantly since the housing bubble in 2008, when the company posted a $1 billion net loss. The year after, CBRE's sales fell a billion dollars to $4.1 billion, but it eked out a $33 million profit. Since then, the company's services and investments have helped it produce impressive growth, both for itself and for shareholders.


After bottoming out around $2.50 per share in March 2009, the stock has seen a few peaks and valleys on its way upwards to $50.43, its all time high that was established over the summer. Of course, the current price is not a fire-sale bargain, but the financial service industry as a whole is much stronger, for now. And, while there is a shifting tide in retail space, retailers are not out of business. The vacant commercial space will eventually shift toward other tenets, because until virtual reality sucks us into the oasis, rendering large space irrelevant, people still like to have somewhere to go outside of their homes. We're just in an economic environment where capital is shifting.

CBRE is, and should remain, the leader in brokering and building these spaces. Its investment arm has about $100 billion, and its real estate advisors are some of the best in the business. The company continues to book solid results. In the last quarter, GAAP earnings per share were 85 cents and revenue was $5.26 billion, up 13.4% year over year. The company is on track to earn north of $3.50 a share in 2019 thanks to strong return on equity (19%) and return on invested capital (15%) rates.

With the stock pulling back nine points since July, it's a good time to buy before the next run.

The company remains strong in global leasing and occupier outsourcing as it manages facilities for firms like Bloomberg and other information providers. In fact, it manages 75 million square feet of data centers globally. It has also raised more cash to make more strategic investments, bringing the tally to $104.5 billion as of the third quarter. And, the total debt is very low. Excluding cash, CBRE's debt is just $1.4 billion, on par with its Ebita.

Looking forward, the company's growth will not be as rapid, but in the next decade, it should continue upwards at a better-than-market pace, more than doubling by 2028 as the world continues to build.

Disclosure: I am not long CBRE.

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This article first appeared on GuruFocus.