CoStar Group: The real-estate enabler

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Mention “real estate” around stock traders, and many are likely to cringe. But there are some bright spots amid the rubble of the subprime lending fiasco and the burst housing bubble, and CoStar Group (Nasdaq:CSGP) could be one of them.

The Bethesda, Md.-based company celebrated last year its 20th anniversary of providing data to the commercial real-estate sector, which undeniably has been hurt by a wounded U.S. economy. By some measures, though, commercial has fared better than residential.

While CoStar Group is not on the front lines searching for a buyer, it is an enabler, dishing up data to connect buyers and sellers.

Analysts who follow CoStar have a generally favorable outlook, despite the sluggish real estate demand. In a recent tally by Thomson Reuters, of the six analysts surveyed, two rated CoStar a “strong buy,” one had it at “buy,” with the other three at “hold.” The Thomson median price target is $56.

However on Tuesday, Needham & Co.’s Jonathan Maietta cut CoStar to “buy” from “strong buy” based on current valuation, but kept his price target at $65.

Since the start of the year, CoStar Group’s share price has meandered closer to its 52-week high of $62.88, set last Oct. 11, while distancing itself from the 52-week low of $35.94 hit on Feb. 7. CoStar Group closed Friday at $53.86.

In its 2007 annual report, CoStar Group calls itself “the leading provider of information services to the commercial real estate industry in the United States and United Kingdom,” backing up that assertion by stating that it offers “the most comprehensive commercial real estate database available, [and has] the largest research department in the industry. …” 

CoStar has found itself embroiled in a number of legal battles. CoStar won a $100,000 judgment from two New Jersey parties who were sharing access to its services, and it obtained a $1 million judgment to settle a complaint brought against an Illinois company that was allegedly taking CoStar’s shopping-mall information and reselling it.

CoStar Group has another legal dogfight with competitor LoopNet (Nasdaq:LOOP). The San Francisco company claimed in a November lawsuit that CoStar was reproducing its listings. CoStar countersued in February, claiming LoopNet was misstating its own Website users. Both companies have denied any wrongdoing.

On its site, CoStar Group offers such services as Property Professional, which lists 2.9 million available properties; COMPS, covering verified sales transactions; and Tenant, a compilation of 3.3 million commercial tenants. In May, the company rolled out Showcase, which provides access to listings of available commercial properties. The company said in the first month, Showcase surpassed $2 million in initial subscription orders, with more than 300 firms signing up to market their listings.

Last September, CoStar announced a new, long-term contract with C.B. Richard Ellis, the world's largest commercial real estate services firm, that brings all its information services into CBRE’s U.S. offices.

CoStar entered the United Kingdom in 2003, and also is operating in France. In the 2007 annual report, founder, president and chief executive Andrew C. Florance called the year “pivotal,” and looking elsewhere, he wrote: “The potential size of the global market I see for our company’s information services is vast.”

On Tuesday, CoStar made public a proposal to acquire REIS (Nasdaq:REIS), a New York-based information provider, through a “friendly” $96.8 million takeover, reiterating an offer that it said was rebuffed in June.

Over the past five years, CoStar has reported some impressive growth. From 2003 until 2007, revenue doubled to $192.8 million, and net income climbed from $100,000 to $16 million. Year-over-year revenue grew 21.3% in 2007.

CoStar Group continues to signal that it’s on the right track. For the three months ended June 30, net income grew 363% to $5.4 million, or $0.28 a share, from the year before. Revenue climbed to $53.5 million from $47.8 million in the 2007 quarter. EBITDA tripled to $12.8 million from the prior year.

Management threw down the gauntlet, stating on July 15 its goal of $100 million in annualized EBITDA by 2010 — a doubling in 2½ years, and lofty when compared with the $34 million reported for 2007 and the $25.9 million of 2006. The company’s EBITDA annual growth goal is 30%.

In his follow-up note to clients, analyst John Neff of William Blair & Co. maintained an “outperform” rating on CoStar, while keeping his earnings estimates conservative. “Management described a commercial real estate (CRE) community that is highly anxious but a CRE market whose fundamentals, while weaker than two years ago, are so far stronger than headlines would suggest,” he wrote.

Deutsche Bank’s Christopher Mammone, who has CoStar as a “hold” and $35 price target, labeled the quarter a “mixed bag.” He voiced concern, writing that “slowing revenue growth remains too prominent a theme for a stock this pricey.”

It’s an admittedly difficult time to be in the real-estate business, but CoStar Group offers the tools to expedite deals. It could find itself on solid footing, once the economy begins picking up steam.

About the Author

Contributing author Paul Rolfes is assistant business editor at The Courier-Journal, the largest daily newspaper in Kentucky.

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