Sundry Photography
Sundry Photography
I still have a Buy rating awarded to Colliers International Group Inc. (NASDAQ:CIGI) (TSX:CIGI:CA) stock. In my prior November 3, 2023 article, I performed a review of Colliers International's results for the second quarter of the previous year.
The current update draws attention to CIGI's latest quarterly earnings and its expected business turnaround. Both the company's revenue and bottom line for Q4 2023 were higher than the respective consensus estimates. Colliers International is expected to record a significant improvement in its financial performance for FY 2024 and FY 2025 based on its new management guidance and its management commentary. I am of the opinion that CIGI's shares have legs to run as the turnaround isn't fully priced in yet. As such, I keep my Buy rating for Colliers International unchanged.
On February 8, 2024, before trading hours, Colliers International revealed the company's Q4 2023 financial performance.
In its fourth quarter results press release, CIGI disclosed that its top line and normalized EPS expanded by +17.0% and +68.1% to $1,235.2 million and $2.00, respectively in the recent quarter on QoQ terms. The company's actual Q4 2023 revenue and bottom line turned out to be +1.9% and +3.5% above the analysts' consensus financial forecasts, respectively.
Colliers International's revenue and earnings beat for the latest quarter can be attributed to the company's defensive top line mix and its expense management efforts.
CIGI mentioned in its Q4 2023 earnings presentation slides that "recurring services" account for over "70% of (the company's) earnings." As such, it is no surprise that Colliers International credited its above-expectations Q4 top line to "growth in its high-value recurring service lines" at its fourth quarter results briefing. In specific terms, the EBITDA contributed by the company's recurring services as a percentage of total EBITDA grew from 70% in the first nine months of last year to 73% for full-year 2023.
The reduction in expenses derived from the company's cost optimization plans was $28 million for Q4 2023, which represented an improvement as compared to the $25 million expense savings that CIGI achieved in Q3 2023.
Colliers International's shares jumped by +9.6% on February 8, 2024, or the day of the results disclosure. Apart from CIGI's better-than-expected Q4 2023 financial results, the market is likely to have been impressed by Colliers' International's forward-looking guidance as detailed in the next section.
CIGI's Q4 2023 results were good as highlighted in the previous section of the article, but the company's full-year FY 2023 performance was poor. Specifically, Colliers International's revenue and normalized EPS decreased by -2.8% and -23.5%, respectively last year. The weak macroeconomic environment in 2023 had hurt CIGI's cyclical businesses like Capital Markets.
As highlighted in my early-November 2023 write-up, I had expected Colliers International to "perform better in 2024" due to "a recovery in its Capital Markets business" and an "improvement in CIGI's financial position." The company's new FY 2024 management guidance proved that I was right about Colliers International's favorable prospects for 2024.
Colliers International has guided for a +7.5% increase in its top line and a +15% growth in the company's normalized EPS this year as per the mid-point of its financial guidance. It will be fair to say that CIGI expects to register a substantial turnaround for FY 2024.
Looking ahead, CIGI stressed at its Q4 2023 earnings call that it sees a "year-over-year increase in activity, particularly in capital markets [my emphasis], coinciding with our expectations of stabilization and interest rates and an improvement in credit conditions" in 2H 2024. Colliers International's revenue generated from the Capital Markets service line grew strongly by +29% QoQ from $160.3 million for Q3 2023 to $207.4 million in Q4 2023. The positive sequential growth trend for CIGI's Capital Markets business in the latest quarter provides support for the management's expectations of a turnaround for this segment in the second half of this year.
Separately, the company's FY 2024 results should benefit from lower finance costs as its financial leverage decreases this year. At the company's Q4 earnings briefing, Colliers International shared its goal of lowering its net debt-to-EBITDA ratio from 2.2 times as of end-2023 to between 1.5 times and 2.0 times by December 31, 2024. As per the consensus data taken from S&P Capital IQ, the analysts are currently forecasting that CIGI's net interest expense could decline by -4% to $90 million for the current fiscal year.
As mentioned earlier, CIGI's stock price went up by almost +10% on the day of the Q4 earnings announcement, but I don't think that the favorable outlook for Colliers International has been completely factored into its shares.
At its fourth quarter results call, Colliers International noted that it anticipates a "more significant rebound in (transactional and capital markets) activity in 2025." In other words, the company expects the recovery for its Capital Markets business to be even more pronounced in 2025 vis-a-vis 2024, and this is reflected in the consensus financial forecasts for CIGI.
The sell side analysts' consensus estimates as per S&P Capital IQ data point to Colliers International's EBIT growing by +19.3% and +37.4% for FY 2024 and FY 2025, respectively, and this is equivalent to an EBIT CAGR of +28.0% for the next two years. In comparison, the market values CIGI at 24.1 times consensus next twelve months' EV/EBIT now. A stock is usually regarded as undervalued if its earnings multiple (24.1 times) is at a discount to its earnings growth rate (+28.0%) which is the case for Colliers International. As such, it is reasonable to think that the expected improvement in financial performance for CIGI in the coming two years hasn't been fully priced in.
Colliers International's shares continue to be rated as a Buy. I think that CIGI can deliver good results for this year and next year, but the expectations of financial performance improvement aren't fully reflected in the stock's valuations.