Cushman & Wakefield’s stock boosted as at least 5 analysts rate it a buy

Shares of real estate services firm Cushman & Wakefield jumped Monday as analysts started coverage of the stock in a series of bullish notes.

The stock CWK, +1.87%  rose 1.5% to $17.92, putting it about 5% above its initial public offering issue price of $17. The firm went public on Aug. 1, raising $765 million that it’s using to pay down debt and for the catchall “general corporate purposes.”

At least five houses initiated coverage with a rating that was the equivalent of buy, focusing on the company’s strong position as one of three of the bigger global players in the space, along with CBRE Group Inc. CBRE, +0.57%  and Jones Lang LaSalle Inc. JLL, +0.08%  

Credit Suisse said a strong economy and real-estate market offer a foundation for growth, while the current trend of outsourcing real estate services is another positive. Cushman is one of the largest providers of outsourcing services.

“Less than half of the addressable market is currently outsourced to real estate providers such as Cushman,” analysts led by Douglas Harter wrote in a note. Credit Suisse started coverage with an outperform rating and $21 stock price target, or 17% above its current trading level.

Harter expects Cushman to achieve 10% growth in earnings before interest, taxes, depreciation and amortization through 2020, through revenue growth and margin expansion.

“Given our favorable view of the real-estate cycle coupled with the favorable industry trends, we expect CWK to generate 6% annual revenue growth through 2020,” he wrote. “In addition, we are expecting 100 basis points of margin expansion for Cushman by 2020, driven by operating leverage as the company fully gets to scale.”

JP Morgan started coverage with an overweight rating and $21 year-end 2019 price target, also highlighting the deeper moat that the big three commercial real estate services platforms are digging around themselves.

“Property investing continues to become more global and institutional as public companies, private equity, asset management firms, pension funds, and sovereign-wealth funds grow to dominate the landscape,” wrote analysts led by Anthony Paolone. “With this shift, service providers that have the greatest reach and resources to provide solutions should gain further market share at the expense of secondary players; this is much like what has happened in financial services and other industries in recent years.”

JP Morgan is also expecting strong Ebitda growth and expects Cushman to look at possible acquisitions to further drive growth.

William Blair started its coverage of the stock with an outperform rating. Compared with its main rivals. Cushman generates more revenue from outsourcing, at about 47%, about a third of adjusted Ebitda, analysts wrote.

The firm provides that service under long, multiyear contracts that include fixed-pricing components. It performs more of those services itself, such as engineering and janitorial services, which gives it more control over outcomes. And it has less exposure to the transactional capital markets than rivals.

“Cushman’s valuation appears attractive, and we believe shares should appreciate at least in line with adjusted EPS growth barring any material change in the economic environment,” wrote analysts Stephen Sheldon and Josh Lamers.

Goldman Sachs initiated coverage with a buy rating and an even more bullish Ebitda growth forecast of 21% for the next two years, compared with 14% growth at broker peers. Analysts led by Andrew Rosivach described Cushman as a “growth stock in the body of a value stock.”

At Morgan Stanley, analyst Vikram Malhotra started coverage with an overweight rating and $21 price target.

“Despite late cycle concerns, we believe share gains and cross-sell opportunities should drive higher-than-anticipated revenue growth and margin expansion to support current multiples,” the analyst wrote.

Analysts are not expecting the company’s higher-than-average leverage to pose much of a problem. The company reduced its leverage to 2.8 times from the mid 4s with the proceeds of the IPO.

While its leverage is higher than its two big rivals—CBRE and Jones Lang LaSalle have leverage that is closer to 1.0 times— the company is expected to generate enough Ebitda to delever the balance sheet in the coming years. Its next big maturity date is not until 2025, said Credit Suisse’s Harter.

William Blair said the only issue is that high leverage might prevent the company from taking advantage of certain M&A opportunities once multiples become more attractive.

“We don’t see liquidity issues with Cushman running at its higher leverage level, but we do think that to the extent business trends were to weaken, it would exacerbate the downside,” wrote JP Morgan’s Paolone.

CBRE shares were up 0.7% Monday and have gained 11% in 2018. Jones Lang LaSalle was up 0.2% and have gained about 4% in 2018. The S&P 500 SPX, +0.74%  has gained 8% and the Dow Jones Industrial Average DJIA, +0.99%  has tacked on 5%.