Following third quarter results today, Jones Lang LaSalle's shares dropped 7% to $47.10, mainly because earnings per share of $0.46 were lower than the $0.58 predicted by analysts (although the $0.61 JLL made when one-offs were stripped out would have been a beat).
Nonetheless, JMP Securities' Will Marks has kept his outperform rating on the company, and maintains a share price target of $57. Here's why:
After a good 3Q, we would continue to buy JLL shares, with our price target at $57; maintain Market Outperform rating. JLL is trading at its historical average forward multiple (15x) yet on earnings that should show considerable growth over time, with upside as sales, leasing, and asset management businesses recover and as JLL continues to grow its management services segment. Conversations with real estate leasing and sales brokers give us comfort with our outlook. Our 2010 EPS estimate of $3.35 compares to 2007 peak EPS of $6.77, and the $9.00 "next peak" figure published in our August 31 peak-to-peak analysis report.
- JLL thrives in 3Q09 despite a terrible real estate environment. JLL's overall market share growth and the expansion of its "annuity" management business led to an EPS decline of just 7%. The earnings trough should be behind JLL, as EPS had fallen by 49% or greater during each of the past six quarters. 3Q09 EPS of $0.61 compares to our estimate of $0.50 and 3Q08 EPS of $0.66. Revenues fell 12% (9% in local currency) and better-than-expected cost-cutting led to EBITDA margins of 10.5% vs. 10.7% during 3Q08. Management stated that "while real estate fundamentals remain generally weak, we see initial signs of recovery in some markets and industry sectors."
- Transaction revenues generally a nice surprise. Capital markets (investment sales) revenues fell 34% (30% in lc), indicating a deceleration in declines, compared to the 47% drop for full-year 2008 and the 50-55% declines in 1H09; we had modeled a 41% decline. In local currencies, Americas and EMEA posted capital markets declines of 62% and 26%, with APAC up 8%. Leasing revenues were down 6% overall (4% in lc) with 23% growth in the Americas (approx. 3% growth adjusted for Staubach). In local currencies, leasing revenues fell 43% in EMEA and 21% in APAC.
- Management services segment continues to provide stability. JLL's property and facility management and other revenue line grew 17% (18% in lc). When including project and development services fees, total "management services" revenues were flat (up 2% in lc) to $232 million, a meaningful figure at 39% of total revenues.
- Investment management division has likely seen its trough. Despite pressure on real estate values, advisory fees of $61 million compared favorably to 1Q and 2Q levels of $60 million and $59 million; incentive fees of any level can be considered a positive, with the 3Q09 result at $3.5 million. During 3Q09, AUM grew from $36.3 billion to $37.6 billion; $1.5 billion of equity was raised.
