June 29, 2016
The Sky Is Not Falling
CBRE (CBG: $26, up 3% today) The global leader in real estate services has seen its stock hammered by the Brexit decision. Just this month, the price has fallen from $31, just before the Brexit vote, by 20% to its low on Monday to just under $25. Is this justified? The answer is no and here is why.
Yes, CBRE has enjoyed the benefits of the huge bull market in London office property.  The region CBRE classifies as Europe, Middle East and Africa is the fastest growing segment of their global empire. This huge geographic region accounts for 27% of worldwide revenues. As for the UK specifically, the UK amounts to 5-10% at most.Â
Remember, the stock has fallen 20% which discounts a great deal of uncertainty. In our view, the price action is telling us that all of the business from this region is going to be lost. This is more than highly unlikely; it is ridiculous.Â
CBRE management is as good as you will find in the real estate business. Here are two things to remember. If Brexit results in the relocation of the financial industry away from London (which we doubt), CBRE services in places like Paris, Frankfort and Switzerland will benefit. We have stated that uncertainty is the enemy of the investor. But we will tell you that the uncertainty of Brexit may just do the opposite for CBRE, producing a surge of business as global real estate investors reevaluate London and the UK and make decisions to buy, sell or hold.
Additionally, with the drubbing of the British currency, residential property values become far more attractive to global real estate investors. (The same is true to a less extent in Europe because of the fall of the euro.)
Wall Street analysts have not had time enough time to crunch the numbers yet. Â But with the stock price having declined as much as 20%, the stock is not selling on numbers; it has overacted based on emotion. Â This is our opportunity.Â
The PE multiple based on pre-Brexit news is only 11. Even if Wall Street drops consensus earnings for 2016 by 20% (which we have stated is preposterous,) the multiple is still a very low 14. The world is not coming to an end. It is time to take advantage of a great opportunity that the market is giving us. CBRE is the best real estate services company on the planet.