Wednesday, July 06, 2005

another short

One stock that I mentioned yesterday was Costar Group (CSGP), an information provider to (primarily) the Commercial RE market. I went short today at $46.36. I see the reward here as 3x the risk, with upside to maybe $50 and downside to the mid-$30s. Here are some of my thoughts:

Valuation is steep--Whether you look at P/E, P/S or P/FCF, CSGP is flat out expensive.

The major IB's that cover CSGP (with the exception of maybe Deutsch Bank) are all strong supporters of the stock and feel that this is a strong operating leverage story. At least two of these guys talk about 30%+ operating margins like they're around the corner. In recent quarters, operating margins have been in the 5-6% range. These analysts basically take what the CEO/CFO feed them and run with it.

The "highly profitable exansion into regional markets"(e.g. Richmond) has been a story of CSGP for the past year or two. We're told that investment in these areas (collecting data on properties, pre-selling product) has been a drag on co. margins. I don't question that OM's can improve with time (not to 30%ish) but I do question the top-line benefit to the regional rollout. What kind of demand from cities like Richmond can CSGP really expect? The big cities across the U.S. are already Costar markets (e.g. LA, NY, Chicago, DC).

If there are all these great opportunities in commercial RE in second tier cities, why go and make a retail acquisition. Seems like smoke & mirrors here.

Selling to institutional clients like Investment Banks hasn't worked out. The CEO was pumping this segment a few CC's ago but no longer mentions it.

Do your own DD of course, but I think CSGP is one worth investigating.


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