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Elevator Pitch
I continue to have a Hold investment rating assigned to Cushman & Wakefield plc’s (NYSE:CWK) shares.
I discussed about the company’s partnerships and investments in my earlier November 26, 2021 article for CWK. I touch on Cushman & Wakefield’s recent quarterly financial performance and near-term outlook in this current update.
CWK’s Q2 2022 results were ahead of investors’ expectations, but the company’s revenue and earnings growth is expected to slow in the current fiscal year. This explains why the market didn’t respond positively to Cushman & Wakefield’s second-quarter earnings beat. I expect CWK’s shares to stay range-bound for the remainder of 2022, given that the company should achieve slower but steady top line and bottom line growth this year. This translates into a Hold rating for Cushman & Wakefield.
Q2 Earnings Beat Failed To Lift CWK’s Share Price
Cushman & Wakefield announced the company’s Q2 2022 financial results last week on August 4, 2022 after the market closed.
CWK’s top line expanded by +16% YoY from $2,248 million in the second quarter of the prior year to $2,613 million in the most recent quarter. Adjusting for the effects of foreign exchange, Cushman & Wakefield’s constant-currency revenue would have increased by an even better +19% in YoY terms.
Non-GAAP adjusted EBITDA for the company grew by +20% YoY from $220 million in Q2 2021 to $263 million in Q2 2022. This implied that Cushman & Wakefield’s adjusted EBITDA margin improved by +20 basis points from 13.5% to 13.7% over the same period. Also CWK’s non-GAAP adjusted earnings per share or EPS jumped by +26% YoY from $0.63 in Q2 2022.
Specifically, Cushman & Wakefield’s second-quarter revenue and adjusted EPS came in +14% and +17% above the Wall Street analysts’ consensus top line and bottom line of $2.3 billion and $0.54 per share, respectively.
However, it is important to note that CWK’s above-expectations financial performance for the recent quarter didn’t translate into significant share price appreciation post-earnings announcement. Cushman & Wakefield’s stock price declined by -4% from $16.61 as of August 4, 2022 to $15.88 as of August 5, 2022 following its Q2 2022 results release. CWK’s shares last closed at $16.09 as of August 10, 2022, and this is still -3% below where the stock traded at prior to its recent financial results announcement.
In my view, the outlook for Cushman & Wakefield is mixed notwithstanding its better-than-expected Q2 EPS, as I will detail in the subsequent sections of the article. This explains why CWK’s share price performance has been uninspiring in the past one week after it reported second-quarter results.
Strong Growth For Capital Markets And Leasing Might Not Be Sustainable
The Capital Markets and Leasing service lines were the key drivers of Cushman & Wakefield’s total revenue growth and above-expectations top line in the recent quarter as discussed in the previous section. Revenue for CWK’s Leasing and Capital Markets service lines grew by +24% YoY and +33% YoY, respectively in the second quarter of 2022 on a constant currency basis.
However, the Capital Markets and Leasing service lines are naturally economically sensitive, and there is a lot of uncertainty regarding how these two service lines will perform in the next few quarters as economic growth slows. Notably, the Leasing and Capital Markets service lines in aggregate accounted for close to half or 48% of Cushman & Wakefield’s total fee revenue for Q2 2022.
At the company’s Q2 2022 investor briefing on August 4, 2022, CWK acknowledged that it sees “second half (2H 2022 YoY) comparisons (for the Capital Markets service line) to be challenging” in view of the high base in 1H 2022. Cushman & Wakefield also observed at the recent quarterly earnings call that “a lot of people being very careful about where they put their capital” which will be negative for Capital Markets transactions in the near term. Separately, it won’t be a surprise that there will be much less interest in leasing new space, when the economy isn’t healthy.
PM/FM Business Is Expected To Be Defensive
In contrast with the Capital Markets and Leasing service lines, Cushman & Wakefield’s Property, Facilities And Project Management service line, referred to as the PM/FM business by the company, should be much more defensive.
The PM/FM service line, which contributed a meaningful 45% of CWK’s overall fee revenue for the recent quarter, saw its segment revenue rise by +16% YoY (adjusted for foreign exchange effects) to $869 million in Q2 2022.
Moving ahead, Cushman & Wakefield’s PM/FM business should be the most recession-resistant of the company’s various service lines. It is worthy of note that CWK stressed at its Q2 2022 earnings briefing that the PM/FM service line “tends to expand pretty strongly” in times where economic conditions are challenging “as our client base themselves seek cost shelter” via outsourcing.
Both the revenue and earnings for Cushman & Wakefield’s PM/FM service line are expected to remain resilient going forward. At its second-quarter investor call, CWK had revealed that “the majority of our contracts have inflation adjusters or contracts that are cost-plus.” This indicates that the profitability of the company’s PM/FM business won’t be negatively affected by inflationary cost pressures to a large extent.
Closing Thoughts
I maintain my Neutral view and Hold rating for Cushman & Wakefield’s stock. The mixed outlook for CWK as seen with the near-term prospects of its different services lines is reflected in the sell-side’s consensus financial projections for the company. As per S&P Capital IQ data, CWK’s top line growth is forecasted to slow down from +19.7% last year to +8.3% this year, and its bottom line (normalized EPS) growth is estimated to moderate from +151.9% in fiscal 2021 to +15.7% in FY 2022. In a nutshell, slower growth is inevitable for Cushman & Wakefield, but the company’s ability to sustain a reasonable level of top line and bottom line growth this year should provide some support for its share price. In summary, a Hold investment rating is fair and appropriate for CWK.
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