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Newmark Group, Inc. (NASDAQ:NMRK) stock continues to be rated as a Buy. NMRK’s Q2 2024 earnings beat has given me confidence that the company can meet its ambitious mid-term EBITDA growth target. Newmark has valuation re-rating potential; I think that NMRK’s EV/EBITDA multiple can expand from the current high-single digit to a low-teens level going forward.
I wrote about the ongoing recovery in NMRK’s capital markets business in my earlier February 26, 2024 article. My current write-up focuses on Newmark’s latest quarterly financial performance.
Positive Earnings Surprise For Q2 2024
On Friday, August 2, 2024, NMRK published an 8-K filing revealing the company’s results for the second quarter of this year. Newmark’s Q2 2024 bottom-line performance was better than what the sell-side analysts had anticipated.
Newmark reported a Q2 2024 non-GAAP adjusted EPS of $0.22, and this was +8.2% ahead of the market’s consensus bottom-line estimate of $0.20. The company’s normalized EPS increased by +22.2% YoY and +46.7% QoQ in the most recent quarter.
In the company’s August 2, 2024 8-K filing, NMRK highlighted that its bottom-line expansion for the latest quarter was mainly boosted by “top-line improvement and strong operating leverage.”
I previously stressed in my late-February update that “the recovery in Newmark’s capital markets business is still in progress, which suggests there is still upside associated with NMRK’s future financial and share price performance.” My bullish opinion of NMRK’s capital markets business has been validated by the company’s Q2 2024 financial numbers.
Top line for Newmark went up by +8.1% YoY in Q2 2024. The company’s best performing business was capital markets (accounting for about 25% of latest quarterly total revenue) whose revenue rose by +14.5% YoY for the recent quarter.
NMRK noted at its Q2 2024 analyst briefing that “interest rates have stabilized” and disclosed that it is “continuing 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 an increase in market share have allowed NMRK to record solid top-line growth in Q2 2024.
Also, NMRK’s latest quarterly bottom line benefited from favorable operating leverage effects.
As mentioned above, Newmark’s EPS grew by +22.2% YoY for Q2 2024. Separately, NMRK’s normalized EBITDA expanded by +18.3% YoY to $86.3 million in the second quarter of this year. In contrast, Newmark’s top line only increased by a relatively more modest +8.1% YoY during the same time period. The faster pace of growth in both EBITDA and EPS vis-a-vis revenue is a clear indication that there is inherent leverage present in Newmark’s high fixed-cost real estate business.
Bullish EBITDA Outlook Suggests That Stock Is Undervalued
Newmark anticipates that the company’s non-GAAP adjusted EBITDA will increase by +7% from $398.3 million in FY 2023 to $426.2 million for FY 2024 as per the mid-point of its guidance. Looking further ahead, NMRK sees its normalized EBITDA rising by +50% from $426.2 million in FY 2024 to $639.3 million in FY 2026 based on its medium-term financial goal. These numbers were sourced from Newmark’s Q2 2024 results announcement or 8-K filing dated August 2, 2024.
I am of the opinion that Newmark’s bullish EBITDA guidance and goal can be realized, taking into consideration both market-specific and company-specific factors.
The market is currently expecting a potential “50 basis point rate cut” in September as per a recent August 2, 2024 Seeking Alpha News report.
In its Q2 2024 earnings presentation slides, NMRK cited research firm Preqin’s projection that there is roughly “$394 billion of investible dry powder held by global closed-end funds at real estate focused institutions.” As the interest rate environment becomes more favorable, it is highly probable that these property investors will put a huge amount of monies to work, which will benefit a real estate services firm like NMRK.
On the other hand, Newmark is well-positioned for further share gains. NMRK’s U.S. investment sales and debt businesses have gained 540 basis points and 440 basis points (source: earnings presentation) of market share, respectively, since 2015.
It is encouraging to see NMRK step up its recruitment efforts to stay ahead of its rivals. At the end of last month, Newmark announced that it “hired Tim Richey as Executive Vice Chairman, Capital Markets, to focus on office and multifamily sales throughout Colorado and the surrounding region.”
In the company’s July 31, 2024 announcement, NMRK highlighted data from “MSCI Real Capital Analytics” indicating that Tim Richey boasted “the dominant market share of all investment sales in the Denver and Boulder markets from 2021 through 2023.” As an industry veteran who has worked in the real estate industry for over three decades, Tim Richey was formerly from CBRE, Newmark’s competitor. In a nutshell, the recruitment of an experienced professional from its peer will likely boost Newmark’s market share expansion efforts in the future.
NMRK’s FY 2024 EBITDA outlook and intermediate-term financial target translate into a potential forward three-year EBITDA CAGR of +17.1%. As a comparison, Newmark is currently trading at a consensus next twelve months’ EV/EBITDA multiple of 8.2 times.
Considering the valuation rule of thumb that a fairly valued stock has an earnings multiple roughly equivalent to its future earnings expansion rate, NMRK’s EV/EBITDA valuation metric has the potential to re-rate to the teens. Notably, Newmark’s key peers, CBRE (CBRE) and Jones Lang LaSalle (JLL) are valued by the market at consensus next twelve months’ EV/EBITDA ratios of 13.6 times and 12.7 times (source: S&P Capital IQ), respectively.
Variant View
My bull case thesis could go wrong under specific scenarios.
A narrower-than-expected decline in interest rates in September or a further delay in rate cuts might see NMRK’s capital markets business underperforming in the quarters ahead.
If Newmark’s top talent is poached by its rivals, this could lead to slower-than-expected market share gains or even a loss in market share.
Conclusion
I retain my Buy rating for Newmark. NMRK’s second quarter earnings beat expectations, and the stock is undervalued based on a comparison of its EV/EBITDA metric and EBITDA growth target.
