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Elevator Pitch
I rate Cushman & Wakefield plc’s (NYSE:CWK) stock as a Hold.
In a prior update for Cushman & Wakefield written on August 11, 2022, I did a review of CWK’s financial results for the second quarter of the current year. My latest article focuses on previewing Cushman & Wakefield’s Q3 2022 earnings release next Thursday and evaluating CWK’s approach towards mergers & acquisitions or M&A.
CWK’s recent M&A deal involving Burbage Realty, a company in the logistics and industrial space, is a good example of how it is growing its presence in high-growth property segments via acquisitions in the long term. In the very near term, market conditions are still tough, and Cushman & Wakefield might fail to meet analysts’ investors with its third quarter results. Therefore, I have continued to assign a Hold rating to CWK.
Preview Of CWK’s Upcoming Third Quarter Financial Results Announcement
Cushman & Wakefield expects to announce the company’s Q3 2022 results on November 3, 2022 after the market closes, as disclosed in CWK’s previous October 4, 2022 press release.
My prediction is that CWK’s actual third quarter earnings will turn out to be lower than what the Wall Street analysts are currently anticipating. Similar to other real estate companies, Cushman & Wakefield faces headwinds such as a rising rate environment and economic weakness. However, the negative outlook for CWK doesn’t appear to have been sufficiently reflected in the sell-side’s consensus figures.
The sell-side analysts have only reduced their Q3 2022 normalized earnings per share or EPS forecast for Cushman & Wakefield by just -1.4% in the past three months based on the change in the consensus estimates. In fact, there were three Wall Street analysts (out of 10 of them who cover CWK’s stock) who even raised their normalized EPS projections for CWK over the same time frame.
Also, industry data suggests that the commercial real estate market didn’t do that well in the most recent quarter. According to an October 6, 2022 article published by The National Association of Realtors, the US “commercial real estate” market “is slowing down in Q3 2022.” Specifically, The National Association of Realtors‘ data points to a decline in occupancy rates for the office market in the third quarter on a QoQ basis.
Taking into account the market’s expectations of CWK’s Q3 2022 performance and relevant industry statistics, I take the view that Cushman & Wakefield’s third-quarter EPS won’t be as good as what the current Wall Street’s consensus numbers suggest.
M&A Approach And Strategy
Cushman & Wakefield previously noted at its second quarter earnings call in early-August 2022 that the company intends to “remain particularly active on the M&A front.” CWK also stressed at the company’s Q2 2022 results briefing that “the investments we have made in fast-growing sectors, like industrial” will be “important growth drivers for the business given the long-term secular trends.”
In just a few days after announcing its Q2 2022 earnings, Cushman & Wakefield revealed in an August 8, 2022 media release that it bought a “specialist UK logistics and industrial consultancy” known as “Burbage Realty Partners Limited.” Notably, CWK emphasized in the press release that this M&A deal “enhances our scale and capabilities in a strategic growth sector (the logistics & industrial space).”
The long-term growth opportunity for the logistics & industrial market is substantial. A March 2022 research report published by Allianz Real Estate highlighted that “e-commerce fulfilment may require as much as three times the logistics space of conventional retail.” Separately, CBRE (CBRE) forecasts that there will be demand for “200 million sq. m. of additional e commerce-dedicated logistics space” worldwide between 2022 and 2026 due to a further increase in the penetration rate of e-commerce. CBRE’s predictions are supported by historical data sourced from Prologis (PLD). PLD’s data showed that when the global e-commerce penetration rate expanded from 15% in 2019 to 21% in 2021, this translated into around 300 million sq. m. of incremental logistics space demand over the same period.
CWK highlighted at the company’s Q2 2022 earnings briefing that its target is to reduce the contribution of office properties as a proportion of its total leasing revenues from 65% now to 50% in the long run, with the shift toward industrial & logistics properties being a key driver of mix optimization. Cushman & Wakefield’s recent acquisition is a step in the right direction, and I expect CWK to continue with its current M&A approach and strategy of acquiring assets or businesses leveraged to “secular trends” such as those in the industrials space.
In conclusion, Cushman & Wakefield plans to optimize its revenue and earnings mix going forward, and M&A will be a key tool to help the company in this respect.
Concluding Thoughts
I stick to my Hold rating for Cushman & Wakefield. A potential EPS miss for CWK next week when it discloses its Q3 2022 results might exert downward pressure on the company’s shares. Looking beyond challenges in the short term, Cushman & Wakefield is doing its best to increase the resilience of its business over the long run by tweaking its revenue mix via inorganic means. Taking into account both short-term headwinds and long-term opportunities, CWK is a Hold-rated stock for me.
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