CoStar’s stock price has taken a beating over the past six months, shedding 49.2% of its value and falling to $34.42 per share. This might have investors contemplating their next move.
Is there a buying opportunity in CoStar, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is CoStar Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in CoStar. Here are three reasons there are better opportunities than CSGP and a stock we'd rather own.
1. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for CoStar, its EPS declined by 1.6% annually over the last five years while its revenue grew by 14.6%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, CoStar’s margin dropped by 17.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s in the middle of a big investment cycle. CoStar’s free cash flow margin for the trailing 12 months was 4.8%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, CoStar’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
CoStar isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 23.2× forward P/E (or $34.42 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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