Wednesday, March 25, 2009

CB Richard Ellis (NYSE:CBG): Upgraded at JP Morgan and JMP Securities

CB Richard Ellis (NYSE:CBG) gets some love from JP Morgan and JMP Securities after announcing a credit amendment:

- JP Morgan upgrades to stock to Overweight from Neutral with a price tgt of $7 tgt saying the credit amendment was a big part of what they wanted to see to get more bullish. Two items have given them pause on this name in the past: 1) the risk of a debt covenant being busted created earnings and liquidity uncertainty, and 2) they thought a single digit earnings multiple on trough earnings would be a good entry point. The company's announced changes to its credit agreement go directly to the first point. As to the second point, CBG now trades at 6.8x JPM's again-lowered EPS estimate. The firm is hopeful that 2009 EPS will mark a trough in the company's business, but the commercial real estate environment continues to weaken considerably. No less, they have tried to incorporate very weak operating assumptions and come to the conclusion that the risk/reward and upside/downside in the stock is attractive.

- JMP Securities is raising their rating on CB Richard Ellis from Market Perform to Market Outperform and establishing a price target of $6, which indicates P/E and EV/EBITDA multiples of 10x and 7x, based on 2009 projections (trough levels, in their opinion).

On Tuesday, CB Richard Ellis announced an amended credit agreement that they believe will allow the company to weather the economic storm. As the firm had already assumed that a revised credit agreement would lead to higher interest expense, their 2009 EBITDA and EPS estimates remain at $512 million and $0.60, down 47% and 72%, respectively, from peak 2007 levels.

The new rating is due to firm's view that: 1) A large part of the bad news is behind us with the just announced revised credit agreement; 2) An improvement in the high-margin investment sales business should be a catalyst within 12 months, as they expect that credit markets will open up an inch from being completely shut down and distressed asset sales should take place. The recently announced Public-Private Investment Program (PPIP) should create liquidity and transaction activity in this regard; 3) The company’s property and facility management business provides a stable stream of revenue and represents approximately 40% of today’s EBITDA; 4) JMP's model already includes dramatically lower leasing fees, down 25% during 2009; and 5) Operating expense reductions should really kick in during 2009, softening the blow from reduced transaction fees. Looking ahead, they do believe that CBG’s position as one of two dominant global commercial real providers should enable it to continue to steal market share from providers that have a more limited product base and less geographic breadth. The stock currently trades at 2009 P/E and EV/EBITDA multiples of 5.0 x and 5.8x.

Notablecalls: CBG is one of the largest real estate brokers in the world. The stock has gotten hit so hard that the credit amendment makes it look pretty good. I suspect we will see a 10-20% upside move in the stock in the n-t. Should be a $4 stock in a few weeks time.

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