Marlon Trottmann
Elevator Pitch
My investment rating for Jones Lang LaSalle Incorporated’s (NYSE:JLL) stock is a Buy.
I touched on Jones Lang LaSalle’s pace of recovery from COVID-19 headwinds and the company’s presence in the Chinese market in my prior October 4, 2021 article for JLL. This article shines the spotlight on Jones Lang LaSalle’s outlook for specific businesses in view of recent news flow and management commentary.
I raise my rating for Jones Lang LaSalle shares from a Hold to a Buy, as I think that positive surprises relating to the performance of JLL Technologies and the capital markets service line should drive the company’s share price upwards.
Expectations For JLL Are Low
The sell-side analysts don’t have huge expectations about Jones Lang LaSalle’s near-term financial performance, as evidenced by the change in the Wall Street’s consensus numbers.
In the past six months, JLL’s Q3 2022 consensus revenue and normalized earnings per share or EPS were lowered by -32% and -12%, respectively. During this same period, analysts also cut the fourth-quarter consensus top line and bottom line for Jones Lang LaSalle by -33% and -16%, respectively.
Also, six of the eight Wall Street analysts covering Jones Lang LaSalle’s shares chose to reduce their respective full-year fiscal 2022 EPS forecasts for the stock in the last three months.
Furthermore, the average sell-side price target for JLL was slashed by -22% from $323.83 as of December 31, 2021 to $253.57 currently, according to S&P Capital IQ. But this also means that the mean target price for Jones Lang LaSalle now implies a substantial +58% upside as compared to the company’s last traded share price of $160.33 as of October 12, 2022.
More importantly, low expectations also mean that there is a good chance of Jones Lang LaSalle delivering positive surprises that act as share price catalysts. Recent news flow for JLL, which I will discuss about in the subsequent sections of this article, suggests that the company’s future prospects aren’t as poor as what the changes in consensus estimates and price targets imply.
Strong Pipeline For Capital Markets
The general perception is that Jones Lang LaSalle’s capital market service line is very cyclical in nature and won’t do well during periods of macroeconomic weakness. However, this might not be true in reality.
At the company’s Q2 2022 earnings briefing in August, JLL highlighted that “the global capital markets, investment sales debt and equity advisory pipeline is up 30%” YoY. While this seems unbelievable, Jones Lang LaSalle’s recent announcement validates the company’s earlier disclosure with regards to the pipeline for its capital markets service line.
On October 6, 2022, Jones Lang LaSalle revealed that the company’s “Capital Markets Investment Sales Advisory team” helped to conclude a “$387.5M sale of New York City multi-housing community.” This recent deal is consistent with JLL’s comments at its second-quarter investor call. Jones Lang LaSalle had previously highlighted at its recent quarterly results briefing that “people are still highly committed to invest further money into real estate” in view of inflation, and “the US market (for capital markets) will perform the strongest of all our markets.”
Notably, JLL’s revenue and EBITDA for the capital markets service line actually rose strongly by +37% YoY and +39% YoY, respectively in 1H 2022 as highlighted in its Q2 2022 results presentation.
In a nutshell, investors seem to be too pessimistic about JLL’s financial outlook in the short term, especially the near-term performance of its capital markets service line. But there are signs that the actual results for the company’s capital markets service line might exceed market expectations.
JLL Technologies’ Growth Potential
Seeking Alpha News reported on October 12, 2022 that JLL Technologies was “awarded a contract for asset and project management for U.S. General Services Administration’s Public Buildings Service.” This recent win by JLL Technologies is aligned with the performance of this business segment in 2022 thus far.
As JLL Technologies is a new business for Jones Lang LaSalle, it doesn’t get the attention it deserves, and investors in general don’t have a good appreciation of JLL Technologies’ potential.
JLL Technologies was the fastest growing business segment for Jones Lang LaSalle in 1H 2022, as it achieved a +50% YoY increase in fee revenue. More significantly, the robust revenue growth for JLL Technologies doesn’t just simply add to Jones Lang LaSalle’s top line.
One key factor is that the increase in revenue contribution from JLL Technologies will help to reduce the company’s overall cyclicality, and this might translate into an expansion of the stock’s valuation multiples in time to come. Specifically, Jones Lang LaSalle emphasized in its Q2 2022 earnings presentation that there will be “continued investments in our technology platform (JLL Technologies) to build a recurring revenue business.”
Another key factor is synergies provided by JLL Technologies. Jones Lang LaSalle mentioned at the company’s second-quarter earnings call that “elements within our technology team and effort within the business line (JLL Technologies)” are “driving growth in other business lines.” At the Raymond James (RJF) Institutional Investors Conference in March this year, Jones Lang LaSalle also noted that one of its key goals is “bringing the best technology to our clients and all our different service offerings” and JLL Technologies plays a big role in this respect. In other words, as the JLL Technologies business expands, this will help to make the company’s other service lines become even more competitive with the use of technology.
In summary, JLL Technologies has significant room to grow, with its 1H 2022 segment fee revenue representing about 5% of the company’s total fee revenue in the same period. As JLL Technologies grows, it will have a positive knock-on effect on the other business lines, and the company’s proportion of recurring revenue will also increase as well.
Bottom Line
Jones Lang LaSalle’s shares are deserving of a Buy rating. The stock’s consensus forward next twelve months’ normalized P/E multiple of 8.5 times now is way below its 10-year average forward P/E ratio of 14.3 times, as per S&P Capital IQ data. I expect positive surprises relating to the company’s capital markets and JLL Technologies businesses to be the catalysts to bring about a re-rating of JLL’s valuations.
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