Newmark Group: Cheap For Valid Reasons (NASDAQ:NMRK)

Elevator Pitch

I award a Hold investment rating to Newmark Group, Inc.’s (NASDAQ:NMRK) shares. A Hold rating for NMRK is justified as the stock’s valuations are cheap for valid reasons. I will consider upgrading my rating for NMRK to a Buy in the future, if the company’s revenue mix becomes more favorable and its equity-based compensation is reduced significantly.

Company Description

Newmark Group refers to itself as “a leading full-service commercial real estate services business” in the company’s press releases. As per its most recent fiscal year 10-K filing, capital markets, management services, and leasing contributed 32%, 31%, and 29% of NMRK’s full-year FY 2021 top line, respectively. Newmark Group derived the remaining 8% of its sales in 2021 from mortgage banking. Newmark Group also indicated in its FY 2021 10-K filing that the “large majority” of its top line is generated by its home market, the US.

Stock Price Performance And Valuations

NMRK’s share price performance has been disappointing to say the least. In the last year, Newmark Group’s stock price dropped by -42%. The company’s key peers, CBRE Group, Inc. (CBRE), Colliers International Group Inc. (CIGI), Jones Lang LaSalle Incorporated’s (JLL), Cushman & Wakefield plc (CWK) saw their respective share prices decline by -15%, -25%, -28%, and -30%, respectively over the same time period.

Newmark Group’s Peer Valuation Comparison

Stock	Consensus Forward Next Twelve Months’ Normalized P/E Valuation Multiple	Consensus Forward Next Twelve Months’ EV/EBITDA Valuation Multiple
Newmark Group	7.2	8.2
Cushman & Wakefield	8.3	8.2
Jones Lang LaSalle	12.6	10.2
Colliers International Group	15.6	11.3
CBRE Group	17.6	12.3

Click to enlarge

Source: S&P Capital IQ

NMRK trades at a meaningful discount to the company’s listed peers based on the consensus forward EV/EBITDA and normalized P/E metrics as highlighted in the peer comparison table presented above.

In summary, Newmark Group’s shares have done poorly in the past year, and it is also the cheapest stock among its peers. On the surface, NMRK appears to be an attractive investment candidate taking into account its undemanding valuation multiples. But there are factors contributing to the cheapness of Newmark Group’s shares, which I detail in the next two sections.

Growing Share Count Hurts The Bottom Line

According to financial data taken from S&P Capital IQ, Newmark Group’s number of shares outstanding rose by +27% from 154.4 million as of December 31, 2017 to 196.2 million at the end of the third quarter of 2021. Although NMRK’s share count was subsequently reduced to 171.8 million as of end-Q3 2022, the company’s shares outstanding have still grown by +11% in the past 19 quarters.

The increase in NMRK’s shares outstanding means that the company’s earnings per share or EPS growth isn’t as fast as that of its net income expansion. For the FY 2017-2022 financial period (including FY 2022 consensus numbers as per S&P Capital IQ data), Newmark Group’s normalized net profit CAGR was +6.8%, but its normalized EPS CAGR was a relatively lower +5.4%.

Newmark Group’s growing share count over the years is mainly attributable to its equity-based compensation. Between 2017 and 2020, NMRK’s equity-based compensation was equivalent to around 11% of its commission revenue for this time period.

On the positive side of things, Newmark Group has set a target of reducing its equity-based compensation-to-commission revenue ratio to a high single-digit percentage in the next few years. But it is no surprise that investors have assigned a valuation discount to NMRK’s shares on the basis that the company’s equity-based compensation has been substantial which led to a growing share count for the company.

Reliance On Capital Markets And Leasing Revenue Is A Major Risk Factor

Raymond James Financial (RJF) issued a research report (not publicly available) titled “Stress Testing CRE Brokers for Transaction Volume Downside” on January 26, 2023. Based on RJF’s projections, Newmark Group is expected to have capital markets and leasing revenue represent 68% of its forecasted top line for full-year fiscal 2022. In contrast, the estimated revenue contribution from the leasing and capital markets businesses for CBRE, Cushman & Wakefield, and Jones Lang LaSalle are much lower at 41%, 45%, and 57%, respectively.

In the event of a severe economic recession that turns out to be much worse than what everyone anticipates, NMRK’s top line is very likely going to fall by a much larger extent as compared to its peers and rivals. This is because Newmark Group generates a greater proportion of the company’s sales from the economically sensitive capital markets and leasing businesses whose revenues are more volatile.

Separately, Newmark Group isn’t geographically diversified, which translates into more substantial downside risks for its future revenues. As I highlighted in an earlier section of the article, NMRK earns most of its sales from the US market. NMRK has set a goal of deriving one tenth of its top line from non-US markets by 2025. Although a 10% foreign sales contribution target isn’t very significant, it is a step in the right direction in terms of revenue diversification.

Closing Thoughts

I like the fact that NMRK has plans for geographic expansion and intends to cut equity-based compensation in the future. However, it will take some time for Newmark Group to diversify its revenue in a meaningful way and stabilize its share count. As such, Newmark Group deserves a Hold rating for now.