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Elevator Pitch
I leave my existing Buy rating for Newmark Group (NASDAQ:NMRK) unchanged.
My prior December 16, 2023, update for NMRK referred to the stock as “an undervalued capital markets recovery play.” 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.
The company’s recently disclosed in-line Q4 2023 results and above-expectations FY 2024 guidance provide support for my bullish view of Newmark. I see no reason to change my Buy investment rating for NMRK, given that the stock is undervalued based on the Price-to-Earnings Growth or PEG metric.
Fourth Quarter Financial Performance Was Largely In Line
Newmark released its Q4 2023 financial results on February 22, 2024, before trading hours.
NMRK’s top line and non-GAAP adjusted EPS grew by +23.1% YoY and +43.8% YoY to $747.4 million and $0.46, respectively for Q4 2023. The company had achieved a major turnaround in the most recent quarter. Prior to this, Newmark had reported negative top line and bottom-line growth for five straight quarters running between Q3 2022 and Q3 2023.
It is also safe to say that Newmark’s key Q4 2023 financial metrics met the analysts’ expectations. The actual fourth quarter revenue for NMRK was +0.5% better than the consensus top-line forecast of $743.5 million, while its Q4 2023 bottom line was just slightly (-1.4%) lower as compared to the consensus EPS projection of $0.47.
Indeed, it was NMRK’s capital markets businesses that drove the sharp increase in top line and earnings for the company in the latest quarter.
In specific terms, the revenue generated from Newmark’s commercial mortgage origination and investment sales businesses expanded by +45.9% YoY and +20.7% YoY, respectively for Q4 2023 as indicated in its earnings presentation slides. It is also important to note that NMRK’s capital markets businesses performed well on both an absolute and a relative (versus the sector as a whole) basis. At its Q4 2023 results briefing, Newmark highlighted that “industry-wide investment sales activity was down by over 40% in the US and Europe, while US commercial and multifamily originations decreased by 25%” for the fourth quarter of the prior year.
As a comparison, NMRK’s non-capital markets businesses, leasing and management services, witnessed relatively more modest sales growth of +19.6% and +19.9%, respectively on a YoY basis in the final quarter of the previous year.
Newmark’s shares went up by +4.6% on the February 22, 2024, trading day, after the company revealed its latest quarterly financial performance in the morning before the market opened. It wasn’t just the Q4 2023 turnaround that impressed investors; NMRK’s favorable financial prospects for 2024 as detailed in the subsequent section are likely to have been viewed in a positive light by the market.
Fiscal 2024 Earnings Guidance Exceeded Expectations
2024 is expected to be a much better year for NMRK vis-à-vis 2023.
Last year, revenue and normalized EPS for Newmark fell by -8.7% YoY and -29.5% YoY to $2,470.4 million and $1.05, respectively. As per the mid-point of the company’s FY 2024 guidance, NMRK is anticipating that its top line and bottom line will rise by +5% and +7%, respectively. The implied fiscal 2024 normalized EPS guidance of $1.12 is significantly higher than the prior consensus bottom-line estimate of $1.01 per share for the current year.
A comparison of NMRK’s FY 2023 numbers with its pre-COVID metrics suggests that it is realistic to expect a further improvement in the company’s financial performance this year.
Revenue derived from the company’s non-capital markets businesses (management services and leasing) in FY 2023 was +22% higher than the combined top-line contribution for these businesses in FY 2019. In contrast, Newmark’s investment sales for the prior year were only 83% of its pre-pandemic or FY 2019 investment sales.
Separately, Newmark outlined its expectations of a +20% increase in “debt capital markets volume” for the company in 2024 at its Q4 2023 earnings briefing. This is based on reasonably conservative assumptions of stable (as opposed to growing) market share and Mortgage Bankers Association’s 2024 forecast of a +20% growth for debt capital markets as a whole, as per NMRK’s management commentary at the quarterly earnings call.
In summary, I hold the view that NMRK’s +7% earnings growth guidance for FY 2024 is achievable.
Current Valuations Point To Further Upside For The Company’s Shares
NMRK’s stock price has gone up by +47% since I upgraded the stock’s rating from a Hold to a Buy with my earlier July 17, 2023 write-up. But I am of the opinion that Newmark’s shares still have legs to run.
Newmark’s shares are cheap relative to its growth prospects. The market is now valuing NMRK at 9.2 times forward FY 2024 P/E based on its EPS guidance of $1.12. But Wall Street sees the company’s normalized EPS expanding at a CAGR of +12.8% (source: S&P Capital IQ) for the FY 2025-2027 time period. This means that Newmark is currently trading at a PEG or Price-to-Earnings Growth multiple of 0.72 times, or below the 1 time implies fair value.
Concluding Thoughts
Newmark’s FY 2024 guidance indicates that the company expects to register decent revenue and EPS growth for the current year. NMRK’s favorable medium-term growth outlook supported by the recovery in capital markets has yet to be incorporated into Newmark’s valuations, considering that it trades at a PEG metric of less than 1. As such, I stick to a Buy rating for NMRK.
