CSGP - Costar Group

[prunes]

I haven't seen anyone talk about any short ideas but I wanted to bring Costar Group (CSGP) to your attention. I work in the real estate industry so I am fairly familiar with the product that Costar offers. They basically provide a data and analytics package used by practically everyone (brokers, landlords, appraisers, investors, etc.) in the commercial real estate industry.

 

Historic revenues are as follows for the past five years

 

2010 (TTM)  $223 MM

2009           $210 MM

2008           $212 MM

2007           $193 MM

2006           $159 MM

 

Below are estimated and actual EPS.

 

2011E   $1.07

2010E   $0.63

2009     $0.94

2008     $1.26

2007     $0.82

2006     $0.65

 

With a market cap of $1.2 B and a share price of $57, trailing P/E is 90x and forward P/E is 54x on consensus expected EPS growth of 70%! To be fair to Costar, earnings have been depressed recently because they have been relocating their headquarters to Washington, DC.

 

Costar's biggest problem in my mind is that it is too successful, quite honestly. Everyone in commercial real estate uses it. Therefore, I find its growth prospects to be very questionable.

 

For fun, I did a back of the envelope reasonableness check. Not that I necessarily agree with the analysts but suppose I give them the benefit of the doubt about 2011 EPS, as after all it is in line with historical performance. Now suppose that over a ten year period, EPS grows by 20% per year, every year. EPS in Year 10 would then be a healthy $5.52. Smack on a 20x P/E and a very aggressive 10% discount rate and the present value implies a share price of $42.57!

 

Growth numbers like these invite competition and although Costar provides a very desired service, its moat should not be viewed as impenetrable by any means.

 

I run a value investing blog and am thinking about running with the above idea as my next post. I would appreciate any constructive criticism on the above thesis.

[Cardboard]

At first glance with revenues growing, I would be afraid to short.

 

Look, I don't know anything about the company, but my head has been handed out to me this year by shorting or shall I say hedging the market by shorting selected equities and that is while using what some have called here: "risk control".

 

I have also looked at many securities shorted by the "pros": Einhorn, Ackman, Tilson and to my knowledge their batting average on the short side has been terrible. That is even with some companies that look like frauds. The only one that seems to have done well this year is Eisman on shorting the for profit education sector.

 

My conclusion, which could be faulty, is that until Bernanke stops the Kool-aid and until we see real signs of slowdown in the U.S. economy that shorting will be a trading business: you have to be nimble to take your profits when they come. Patience or short and hold is financial suicide in this environment where every boat seems to be going up with the tide.

 

It only seems to work with companies where trouble emerges, then the sharks come in attracted by the blood. So for Costar, I would suggest that you wait for trouble to appear. You may not get the top, but at least you won't be hurt by the Street as they keep squeezing.

 

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