Newmark Group: Stocks Are Undervalued Given EBITDA Outlook (NASDAQ:NMRK)

Newmark Group, Inc. (NASDAQ:NMRK) the stock remains a Buy. NMRK’s Q2 2024 results beating earnings gave me confidence that the company can achieve its ambitious EBITDA growth target in the medium term. Newmark has a valuation re-pricing potential; I think NMRK’s EV/EBITDA multiple could rise from its current high single-digit level to the low teens.

I wrote about the ongoing recovery in NMRK’s capital markets activity in my earlier article dated February 26, 2024. My current article focuses on Newmark’s latest quarterly financial results.

Positive surprise on Q2 2024 earnings

On Friday, August 2, 2024, NMRK released its 8-K filing revealing the company’s second-quarter results for the year. Newmark’s second-quarter 2024 results were better than sell-side analysts had anticipated.

Newmark reported Q2 2024 non-GAAP adjusted earnings per share (EPS) of $0.22, was +8.2% above the market consensus of $0.20. The company’s normalized earnings per share increased by +22.2% year-over-year and +46.7% quarter-over-quarter in the latest quarter.

In the company’s 8-K report dated August 2, 2024, NMRK highlighted that its net income growth in the latest quarter was mainly boosted by “revenue improvement and strong operating leverage.”

I previously highlighted in my late February update that “Newmark’s capital markets business is still recovering, suggesting there is still upside potential related to NMRK’s future financial position and share price.” My bullish view of NMRK’s capital markets business was confirmed by the company’s Q2 2024 financial results.

Newmark’s revenue grew 8.1% year-over-year in the second quarter of 2024. The company’s best performing business was Capital Markets (accounting for approximately 25% of its latest quarterly total revenue), with revenue growing 14.5% year-over-year in the latest quarter.

NMRK noted in its Q2 2024 analyst briefing that “interest rates have stabilized” and revealed that it “continues to gain market share in both investment sales and debt.” In other words, a more favorable market environment (“rate stability”) for capital markets transactions and market share growth allowed NMRK to post solid revenue growth in Q2 2024.

In addition, NMRK’s last quarterly financial result was influenced by the favourable impact of operating leverage.

As noted above, Newmark’s EPS rose +22.2% YoY in Q2 2024. Separately, NMRK’s normalized EBITDA rose +18.3% YoY to $86.3 million in Q2 of this year. By contrast, Newmark’s top line only grew by a relatively more modest +8.1% YoY over the same period. The faster pace of both EBITDA and EPS growth relative to revenue is a clear signal that Newmark’s high-fixed-cost real estate business is leveraging.

Bullish EBITDA forecasts suggest stocks are undervalued

Newmark expects the company’s non-GAAP adjusted EBITDA to increase +7% from $398.3 million in fiscal year 2023 to $426.2 million in fiscal year 2024, in line with the midpoint of its guidance. Looking further ahead, NMRK expects adjusted EBITDA to increase +50% from $426.2 million in fiscal year 2024 to $639.3 million in fiscal year 2026, in line with its medium-term financial target. These numbers are from Newmark’s Q2 2024 earnings call or 8-K filing dated August 2, 2024.

I believe that Newmark’s optimistic EBITDA forecasts and target can be achieved, given market and company-specific factors.

According to a recent report by Seeking Alpha News on August 2, 2024, the market is now expecting a potential “50 basis point rate cut” in September.

In its Q2 2024 earnings presentation, NMRK cited research firm Preqin’s forecast that global funds locked up in real estate-focused institutions have about “$394 billion of ready-to-deploy capital.” As the interest rate environment becomes more favorable, it’s highly likely that these real estate investors will invest massive amounts, which will benefit a real estate services company like NMRK.

On the other hand, Newmark is well-positioned for further share gains. NMRK’s investment sales and US debt business have gained 540 basis points and 440 basis points (source: earnings presentation) of market share since 2015, respectively.

It’s encouraging to see NMRK ramping up its recruiting efforts to stay ahead of the competition. Late last month, Newmark announced it had “hired Tim Richey as executive vice president of capital markets to focus on the sale of office and multifamily properties throughout Colorado and the surrounding areas.”

In the company’s July 31, 2024 announcement, NMRK highlighted data from “MSCI Real Capital Analytics” indicating that Tim Richey boasted “a dominant market share of all investment sales in the Denver and Boulder markets from 2021 through 2023.” An industry veteran who has worked in real estate for over three decades, Tim Richey was previously with CBRE, a competitor of Newmark. In short, the recruitment of a seasoned professional from among his peers will likely bolster Newmark’s efforts to expand market share in the future.

NMRK’s fiscal 2024 EBITDA guidance and medium-term financial target translates into a potential three-year EBITDA CAGR of +17.1%. By comparison, Newmark is currently trading at a consensus NTMB EV/EBITDA multiple of 8.2.

Given the valuation rule of thumb that fairly valued stocks have an earnings multiple roughly equal to their forward earnings growth rate, NMRK’s EV/EBITDA valuation has the potential to re-price it to the teens. Interestingly, Newmark’s key competitors, CBRE (CBRE) and Jones Lang LaSalle (JLL), are valued by the market at a consensus forward valuation of 13.6x and 12.7x, respectively (source: S&P Capital IQ).

Variant View

My optimistic thesis may turn out to be wrong in certain scenarios.

A smaller than expected decline in interest rates in September or a further delay in interest rate cuts could result in NMRK’s capital markets activities underperforming in the coming quarters.

If Newmark’s top employees are poached by rivals, it could lead to slower-than-expected market share growth or even a loss of market share.

Application

I maintain my Buy rating on Newmark. NMRK’s Q2 earnings beat expectations and the stock is undervalued based on EV/EBITDA and EBITDA growth target.