Business Services company CoStar is standing out today, surging to $77.79 and marking a 3.9% change. In comparison the S&P 500 moved only -2.0%. CSGP is -19.66% below its average analyst target price of $96.83, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, CoStar has underperfomed the S&P 500 by 33.0%, moving -11.3%.
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 a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
CoStar's trailing 12 month P/E ratio is 149.6, based on its trailing EPS of $0.52. The company has a forward P/E ratio of 61.7 according to its forward EPS of $1.26 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.15, and the average for the S&P 500 is 28.21.
CSGP’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for CoStar, we obtain a PEG ratio of 9.29, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of CoStar's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,455,000 | 1,681,200 | 11 | -47.62 |
| 2022 | 2,182,400 | 1,317,400 | 21 | -4.55 |
| 2021 | 1,944,100 | 1,154,600 | 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 |
- Average operating margins: 20.0 %
- Average operating margins growth rate: -14.8 %
- Coefficient of variability (lower numbers indicate less volatility): 160.64 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From CoStar's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 489,500 | 117,500 | 372,000 | -16.12 |
| 2022 | 478,700 | 35,200 | 443,500 | 28.18 |
| 2021 | 469,700 | 123,700 | 346,000 | -20.96 |
| 2020 | 486,106 | 48,347 | 437,759 | 6.36 |
| 2019 | 457,780 | 46,197 | 411,583 | 34.58 |
| 2018 | 335,458 | 29,632 | 305,826 |
- Average free cash flow: $386.11 Million
- Average free cash flown growth rate: 0.7 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, CSGP is in a position to do either -- which can encourage more investors to place their capital in the company.
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 Consumer Discretionary sector, which stands at 3.11 as of the second quarter of 2024.
CoStar is by most measures fairly valued because it has a higher P/E ratio than its sector average, an average P/B ratio, and generally positive cash flows with a flat trend. The stock has mixed growth prospects because it has a an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of CSGP's fundamentals.
