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Realogy Stock Looks Cheap as Housing Booms

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conix   Tuesday, 05/18/21 11:25:01 AM
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Realogy Stock Looks Cheap as Housing Booms

By Shaina Mishkin

Updated May 17, 2021

Whether it’s lumber, appliances, or home-builder stocks, housing plays have been red-hot. But there’s an odd exception to the broader housing rally: Shares of the country’s largest real estate brokerage remain cheap.

Realogy Holdings (ticker: RLGY), owner of familiar brands like Century 21, Coldwell Banker, and Corcoran, has rebounded from pandemic lows but still trades at just a third of its all-time high. Realogy also operates a mortgage business that originates purchases and refinances home loans. The stock could be the one bargain left for investors in search of exposure to the housing boom.

As the spring home-buying season heats up, Realogy’s 327,500 affiliated agents are in high demand. Their commissions generate the bulk of Realogy’s revenue, which jumped 32% in the first quarter to $1.5 billion. Realogy’s agents represented buyers or sellers in an estimated 16% of all U.S. home sales over the past 12 months.

Despite the favorable backdrop, Realogy trades at just 6.3 times earnings estimates for the next 12 months, less than half its five-year average. That’s cheaper than Re/Max Holdings (RMAX), a smaller real estate franchise holding company that fetches 15.6 times forward earnings. And it’s significantly less expensive than more tech-forward residential housing play Zillow Group (Z), which changes hands at 87 times estimated earnings.

Realogy Holdings
Residential real estate services company
Headquarters: Madison, N.J.
Recent Price: $17.21
YTD Change: 31.1%
2021E Sales (bil): $7.5
2021E Ebitda* (mil): $864
2021E EPS: $2.96
2021E P/E: 5.8
Market Value (bil): $2.0
E=estimate. *Earnings before interest, taxes, depreciation, and amortization

Source: Bloomberg

Realogy sales are forecast to rise 20% this year, to $7.5 billion, with earnings per share of $2.96, compared with a loss of $3.13 last year because of the Covid downturn.

Realogy is well aware of its perception as the legacy player in the fast-changing brokerage field. “Convincing people that a longtime market leader is actually leading the transformation of an industry is a very difficult thing,” Realogy CEO Ryan Schneider says.

The company is making progress, however, through investments in its digital title business, productivity tools for agents, and RealSure, its answer to home-flipping platforms for what’s become known as iBuying.

Nevertheless, Wall Street remains lukewarm on Realogy. Of the six analysts who cover the stock, just two rate it Buy or an equivalent, according to FactSet. The lack of enthusiasm could be an opportunity for investors, especially if the housing market stays hot.

“There are very few ways to directly benefit from home prices going up,” says Evercore’s Stephen Kim, the Street’s most bullish Realogy analyst. He has a Buy rating, with a price target of $29, or 68% above the stock’s recent close of $17.21.

Schneider says Realogy’s long history and nationwide footprint still provide a competitive advantage—but its long tenure is a double-edged sword. “Everybody just finds it easier to look at the new companies,” he says.

One reason is Realogy’s high debt load, driven by a long history of mergers, licensing agreements, spinoffs, and acquisitions, dating back to 1995. Realogy went public in 2012, with more than $7.5 billion in debt.

Now, the company is prioritizing debt paydown, says Charlotte Simonelli, Realogy’s chief financial officer, who joined the company in 2019. Debt has gradually fallen, to $3.9 billion at the end of the first quarter.

Realogy’s dependence on commissions has weighed on investor sentiment at a time when Zillow and newly public Compass (COMP) and Opendoor Technologies (OPEN) are pushing to disrupt the residential brokerage world. Compass is aggressively courting agents, while Opendoor and Zillow are building iBuyer models that buy and sell homes directly, cutting traditional agents out of the process.

Despite the growth of iBuyers, most home purchases involve a real estate agent. A recent National Association of Realtors survey finds that 88% of buyers used one to purchase a home—including 91% of buyers 30 and under.

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Realogy skeptics point to the rising cost of agents. Competition, especially from Compass, is pushing Realogy to offer more generous commission splits. Simonelli says that renegotiating agents’ split of a home-sale profit is a cost of doing business. “We’re still growing margins, and the numbers speak for themselves,” she adds.

Realogy’s higher-end home sales should provide insulation from further disruption. The sale of homes priced at $1 million or above grew by more than 100% in March versus a year ago, according to the National Association of Realtors. Unlike other categories, the $1-million-plus home market has been spared a supply crunch—and it’s a sweet spot for several Realogy brands. “Our luxury success is a big part of our market-share gains across our Sotheby’s International Realty brand, our Corcoran brand, and our Coldwell Banker brand,” CEO Schneider says.

The average home sale represented by a Realogy brokerage agent was $608,960 in the first quarter—well above the national average. And the company’s luxury-market share could keep growing as home buying picks up in New York City, in particular, where Realogy describes itself as a market leader.

“New York City had the roughest ride through Covid, from a real estate standpoint,” Schneider says. “We believe in New York City, and we can now see it in the numbers,” he says.

Now investors just need to believe in Realogy’s stock.

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