One of Wall Street's biggest winners of the day is CoStar, a real estate development company whose shares have climbed 3.1% to a price of $86.56 -- near its average analyst target price of $91.0.
The average analyst rating for the stock is buy. CSGP may have outstripped the S&P 500 index by 1.0% so far today, but it has lagged behind the index by 5.4% over the last year, returning 18.7%.
CoStar Group, Inc. provides information, analytics, and online marketplace services to the commercial real estate, hospitality, residential, and related professionals industries in the United States, Canada, Europe, the Asia Pacific, and Latin America. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
CoStar's trailing 12 month P/E ratio is 94.1, based on its trailing EPS of $0.92. The company has a forward P/E ratio of 66.6 according to its forward EPS of $1.3 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 12.38, and the average for the S&P 500 is 15.97.
CSGP’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for CoStar, we obtain a PEG ratio of 6.09, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of CoStar's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,388,286 | 1,583,745 | 14 | -33.33 |
| 2022 | 2,182,399 | 1,317,442 | 21 | -4.55 |
| 2021 | 1,944,135 | 1,154,557 | 22 | 29.41 |
| 2020 | 1,659,019 | 1,060,849 | 17 | -34.62 |
| 2019 | 1,399,719 | 746,933 | 26 | 13.04 |
| 2018 | 1,191,832 | 648,335 | 23 | n/a |
- Average operating margins: 20.5 %
- Average operating margins growth rate: -10.6 %
- Coefficient of variability (lower numbers indicate less volatility): 137.64 %
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
CoStar's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.58 as of the first quarter of 2023.
With a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and No published cashflows with an unknown trend, we can conclude that CoStar is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and an inflated PEG ratio.
