This article is part of our Rising Star Portfolios Series.
I know you shouldn't get emotionally involved with your investments, but after spending a few years following a company, it's hard not to get attached. I've covered Jones Lang LaSalle
JLL is one-half of a duo (CB Richard Ellis Group
JLL's competitive strength lies primarily in its global platform. With 185 offices in 60 countries, the company possesses vast local knowledge of international real estate markets. This is a key attribute that multinational corporations look for when hiring an advisor. Global corporations have increasingly turned to outsourcing their real estate services in order to cut overhead and focus on their own core competencies. JLL's ability to service a client's entire portfolio of assets across multiple countries provides these clients with the convenience of dealing with a single provider and has led to deals with an impressive list of corporate customers that includes Citigroup
JLL possesses an experienced management team under the direction of CEO Colin Dyer and CFO/COO Lauralee Martin. The duo has years of industry experience and has piloted the company through its rapid expansion since 2005. JLL has proven to be an adept acquirer of strategic assets and, thanks to its strong balance sheet, the company will likely continue to roll up smaller companies now that market conditions have stabilized.
JLL's business model also benefits from the ability to offer solutions to the market's problem du jour. In recent years the company has been able to offer services to banks that need help managing and selling a portfolio of foreclosed commercial real estate. When energy prices spiked, JLL expanded its offering of energy-efficient building systems design and management, which allowed building owners to reduce their operating costs. The company is seeing a resurgence in this business as oil prices surge back over $100 a barrel and has so far documented over $125 million in energy savings for clients like McDonald's
The art of the deal
In the time that I've followed JLL, its stock has rarely looked cheap, but the financial and political shenanigans taking place in the EU have finally provided the opportunity to pick up shares at attractive levels. With the fourth quarter winding down, and JLL's stock at $60 a share, the company is trading for 13 times estimated 2011 earnings. That's fairly cheap compared with historical multiples and considering analysts' expectations of 17% compounded growth over the next five years.
Because of the cyclical nature of the CRE industry, the acquisitiveness of the company, and many disparate business segments under the JLL umbrella, putting together a discounted cash-flow model is an exercise in imprecision. If I work backward, using a 12% hurdle as my discount rate, then shares today are priced to achieve about 8% sales growth over the next decade and a percentage point or two of operating margin expansion (which still remains below historical averages). As the CRE market continues to recover, I think JLL will easily best those numbers and that shares are more likely worth somewhere in the $70 to $80 range.
What I'm watching
In the short term, all eyes will be on Europe. If European banks get into trouble, then credit markets could seize and kill transaction volume in the region. The global CRE market has always been cyclical, but it's also becoming increasingly correlated due to the interconnectivity of the capital markets. Also, as an international company that generates about half of its revenue overseas but reports earnings in U.S. dollars, JLL's profitability is highly susceptible to the whims of the currency market. Currencies have been unusually volatile this year and I don't expect that to change anytime soon.
The Foolish bottom line
Though we've hit a rough patch in the global economy, JLL's management believes that we're still in the beginning stages of a CRE cyclical recovery. Thanks to initiatives that the company took during the financial crisis to cut operating costs and strengthen the company's balance sheet, JLL is in a strong position to consolidate market share as the CRE market continues to stabilize. This strategy has been a central component of the company's historic growth. As deal activity and transaction volume begins to pick up, JLL should see significant operating leverage, which should return the company to previous levels of profitability and reward shareholders handsomely.
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