Newmark Group: Recovery Is Underway (NASDAQ:NMRK)

elevator pitch

You will retain your existing purchase level. Newmark Group (NASDAQ:NMRK) There is no change.

My previous December 16, 2023 NMRK update referred to the stock as an “undervalued capital markets recovery play.” Restoration of Newmark Capital The markets business is still ongoing, which suggests there is still upside associated with NMRK’s future financial and stock price performance.

The company’s recently released inline Q4 2023 results and better-than-expected FY 2024 guidance support my bullish view on Newmark. There is no reason to change our Buy investment rating on NMRK, given that the stock is undervalued based on price-to-earnings (PEG) metrics.

Financial performance in the fourth quarter was broadly similar

Newmark announced its fourth quarter 2023 financial results prior to trading hours on February 22, 2024.

NMRK’s top line and non-GAAP adjusted EPS increased. In the fourth quarter of 2023, it increased +23.1% and +43.8% YoY to $747.4 million and $0.46, respectively. The company achieved a significant turnaround in its most recent quarter. Prior to this, Newmark recorded five consecutive quarters of negative sales and net profit growth from the third quarter of 2022 to the third quarter of 2023.

It’s safe to say that Newmark’s key financial metrics for the fourth quarter of 2023 met analyst expectations. NMRK’s actual Q4 revenue was +0.5% better than the consensus top revenue forecast of $743.5 million, while Q4 2023 net income was slightly (-1.4%) below the consensus EPS forecast of $0.47.

In fact, it was NMRK’s capital markets business that boosted the company’s sales and earnings sharply in recent quarters.

Specifically, as shown in the earnings presentation slide, revenue generated from Newmark’s commercial mortgage origination and investment sales businesses increased +45.9% YoY and +20.7% YoY, respectively, in the fourth quarter of 2023. It is also important to note that NMRK’s capital markets business has performed well on both an absolute and relative (relative to the sector as a whole) basis. In its Q4 2023 results briefing, Newmark highlighted that compared to the previous year’s fourth quarter, “industry-wide investment sales activity in the U.S. and Europe fell more than 40%, while U.S. commercial and multifamily originations fell 25%.”

In comparison, NMRK’s non-capital markets business, Leasing and Management Services, saw relatively modest revenue growth of +19.6% and +19.9%, respectively, in the fourth quarter of last year compared to the same period last year.

Shares of Newmark rose +4.6% on the trading day of February 22, 2024, after the company released its latest quarterly financial results in the morning before the market opened. It wasn’t just the turnaround in the fourth quarter of 2023 that impressed investors. As described in the next section, NMRK’s favorable financial outlook for 2024 is likely to have been viewed positively by the market.

Fiscal 2024 revenue guidance exceeded expectations.

2024 is expected to be a much better year for NMRK compared to 2023.

Last year, Newmark’s revenue and regular EPS decreased -8.7% YoY and -29.5% YoY, respectively, to $2.4704 billion and $1.05. Based on the midpoint of the company’s fiscal 2024 guidance, NMRK expects revenue and net income to increase by +5% and +7%, respectively. Fiscal 2024 normalized EPS guidance of $1.12 is significantly higher than the previous consensus earnings estimate of $1.01 per share for the current year.

Comparing NMRK’s FY 2023 numbers to pre-COVID-19 metrics shows that it is realistic to expect further improvement in the company’s financial performance this year.

Revenue derived from the Company’s non-capital markets businesses (management services and leasing) in 2023 was 22% higher than the total revenue contribution of these businesses in fiscal 2019. By comparison, Newmark’s prior-year investment revenue was 83% of its pre-pandemic, or FY 2019, investment revenue.

Separately, Newmark outlined expectations in its fourth quarter 2023 earnings briefing that the company’s “debt capital markets volume” will increase by more than 20% in 2024. This is based on reasonably conservative assumptions of stable (not growing) market share and the Mortgage Bankers Association’s forecast of +20% growth in overall debt capital markets in 2024, according to NMRK’s management comments in its quarterly earnings call. Let’s do it.

In summary, I am of the view that NMRK’s +7% revenue growth guidance for fiscal 2024 is achievable.

Current valuations point to further upside for the company’s stock.

NMRK’s stock price has risen +47% since I upgraded the stock’s rating from Hold to Buy in an article I wrote early on July 17, 2023. But I think Newmark’s stock still has room to move.

Newmark’s stock price is cheap relative to its growth prospects. The market currently values ​​NMRK at 9.2x FY 2024 P/E based on EPS guidance of $1.12. However, Wall Street sees the company’s regular EPS expanding at a CAGR of +12.8% (Source: S&P Capital IQ) for the period FY 2025-2027. This means that Newmark is currently trading at a PEG, or price-to-earnings-growth multiple of 0.72x, or less than 1x implies fair value.

concluding thoughts

Newmark’s FY 2024 guidance indicates that the company expects to record significant revenue and EPS growth this year. NMRK’s favorable medium-term growth prospects, aided by the recovery in capital markets, are not yet reflected in Newmark’s valuation, given that the PEG indicator is trading below 1. Therefore, I maintain a Buy rating on NMRK.