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I retain my existing buy rating Newmark Group (NASDAQ: NMRK)constant.
I previously called the stock an “undervalued capital markets recovery stock” when I updated NMRK on December 16, 2023.The resurgence of newmark capitals Market operations are still ongoing, which suggests there is still room for upside in NMRK’s future financial and share price performance.
The company’s recent disclosure of in-line fourth-quarter 2023 results and higher-than-expected fiscal 2024 guidance lend support to my bullish view on Newmark. Given that the stock is undervalued based on the price-to-earnings-to-growth, or PEG, metric, I see no reason to change NMRK’s Buy investment rating.
Fourth-quarter financial results were broadly in line with expectations
Newmark released its fourth quarter 2023 financial results before trading hours on February 22, 2024.
NMRK’s Revenue and Non-GAAP Adjusted EPS Growth In the fourth quarter of 2023, the annual growth rate was 23.1% and 43.8%, reaching US$747.4 million and US$0.46 respectively. The company made a major turnaround in its most recent quarter. Prior to this, Newmark reported five consecutive quarters of negative revenue and profit growth from the third quarter of 2022 to the third quarter of 2023.
It’s safe to say that Newmark’s key fourth-quarter 2023 financial metrics met analysts’ expectations. NMRK’s actual fourth-quarter revenue topped the consensus forecast of $743.5 million by 0.5%, while its fourth-quarter 2023 net income was just shy (-1.4%) of the consensus EPS estimate of $0.47.
In fact, it was NMRK’s capital markets business that drove significant growth in the company’s revenue and earnings in the most recent quarter.
Specifically, as shown in the earnings presentation slide, revenue from Newmark’s commercial mortgage origination and investment sales businesses increased 45.9% and 20.7% annually, respectively, in the fourth quarter of 2023. Notably, NMRK’s capital markets business has performed well on both an absolute and a relative (relative to the overall industry) basis. Newmark emphasized at its fourth-quarter 2023 results presentation that compared with the fourth quarter of last year, “investment sales activity across the U.S. and Europe fell by more than 40%, while U.S. commercial and multifamily origins fell by 25%. ”.
In comparison, sales growth in NMRK’s non-capital markets business, leasing and management services, was relatively modest, with annual increases of +19.6% and +19.9% in the last quarter of last year.
Newmark shares were up +4.6% on the February 22, 2024 trading day after the company reported its latest quarterly financial results in the morning before the bell. It’s not just the improved results in the fourth quarter of 2023 that impressed investors; the market is likely to be positive about NMRK’s favorable financial outlook in 2024, as discussed in the next section.
Fiscal 2024 profit guidance beats expectations
NMRK expects 2024 to be a better year compared to 2023.
Last year, Newmark’s revenue and normalized earnings per share decreased by -8.7% and -29.5% respectively to $2.4704 billion and $1.05. At the midpoint of the company’s fiscal 2024 guidance, NMRK expects its revenue and profits to grow +5% and +7%, respectively.Implied fiscal 2024 normalized EPS guidance of $1.12, significantly above the previous consensus bottom-line estimate $1.01 per share during the year.
Comparing NMRK’s fiscal 2023 figures with pre-COVID-19 metrics suggests it is realistic to expect further improvement in the company’s financial performance this year.
In fiscal 2023, the company’s non-capital markets businesses (managed services and leasing) generated revenue that was 22% higher than the total revenue contribution of these businesses in fiscal 2019. In comparison, Newmark’s investment sales the previous year accounted for only 83% of its pre-pandemic or fiscal 2019 investment sales.
In addition, Newmark outlined the company’s expectations for a 20% growth in “debt capital market transaction volume” in 2024 in its fourth quarter 2023 financial report. This is based on reasonably conservative assumptions of market share stability (rather than growth) and the Mortgage Bankers Association’s forecast of 20% overall debt capital market growth in 2024 (per NMRK’s management comments on its quarterly earnings call).
All in all, I think NMRK’s guidance of 7% earnings growth for fiscal 2024 is achievable.
Current valuations suggest further upside potential for the company’s share price
Since I upgraded NMRK stock from “Hold” to “Buy” in my earlier review on July 17, 2023, NMRK stock has gained +47%. But I think Newmark shares still have room to rise.
Newmark’s stock price is cheap relative to its growth prospects. Based on NMRK’s $1.12 EPS guidance, the market currently values NMRK at 9.2 times forward fiscal 2024 P/E. But Wall Street expects the company’s normalized EPS to expand at a CAGR of +12.8% (Source: S&P Capital IQ) fiscal year 2025-2027. This means that Newmark’s current PEG or price-to-earnings growth multiple is 0.72x, or less than 1x implying fair value.
concluding thoughts
Newmark’s fiscal 2024 guidance indicates that the company expects to achieve substantial revenue and earnings per share growth this year. NMRK’s favorable medium-term growth prospects, supported by a recovery in capital markets, have not yet been factored into Newmark’s valuation, given that its PEG metric is below 1. Therefore, I stick with my buy rating on NMRK.
