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Neutral Stance on CBRE Group

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On Nov 20, 2013, we reaffirmed our Neutral recommendation on CBRE Group Inc. . We note that though commercial mortgage brokerage revenue headwinds, currency fluctuations and cautious attitude of occupiers and investors remain headwinds, the company’s solid and flexible capital structure,  strategic acquisitions as well as its growing outsourcing, leasing and investment management business would strengthen its position going forward. Hence, our Neutral stance remains in place.

Why Neutral?

CBRE Group’s third-quarter 2013 adjusted earnings came in at 30 cents per share, missing the Zacks Consensus Estimate by 3 cents. However, it was 15% higher than 26 cents earned in the prior-year quarter. Though the company experienced a rise in revenues, higher expenses acted as the dampener.

During the quarter, CBRE signed a total of 54 Global Corporate Services (GCS) contracts, including 20 with new customers such as Heinz, Tesla Motors Inc. (TSLA - Free Report) and EMG, a Japan-based petroleum and petrochemical company.

Property sales remained the leading growing service line in the third quarter, while leasing growth accelerated and occupier outsourcing posted double-digit growth. Yet, commercial mortgage brokerage revenue declined owing to the negative impact from the U.S. Government-Sponsored Enterprises’ (GSEs) initiatives to scale back their lending activity, as commanded by their regulators. We believe that the new regulatory limits on GSE lending would continue to restrict commercial mortgage brokerage business revenues going forward.

For CBRE, over the last 30 days, the Zacks Consensus Estimate for 2013 fell by 0.7% to $1.43 per share and for 2014 it moved down 1.2% to $1.68. Therefore, the stock currently carries a Zacks Rank #4 (Sell).

Nevertheless, we note that due to the gradual economic recovery, vacancy rates are decreasing while rental rates are exhibiting an improving trend. Moreover, with ample availability of low-cost credit, property sales have increased as investors are looking for a decent yield. As a result, we expect sustained healthy property sales activity in the upcoming quarters as well.

Moreover, in recent times, the company has opted for a number of strategic acquisitions including CB Richard Ellis Carmody, KLMK Group, Alan Selby & Partners to expand its business in the U.S. and U.K. and is in a deal to acquire UK-based commercial building technical engineering services provider, Norland Managed Services Ltd. for increasing its capabilities and expanding its corporate outsourcing platform in Europe. We believe that such opportunistic acquisitions would serve as growth drivers, supplementing the company’s organic growth.

Other Stocks to Consider

Better-placed stocks in the same industry include E-House (China) Holdings Limited and Kennedy-Wilson Holdings Inc. (KW - Free Report) . Both these stocks carry a Zacks Rank #1 (Strong Buy).

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