CBRE has been on fire lately. In the past six months alone, the company’s stock price has rocketed 57%, reaching $139.81 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in CBRE, 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.We’re happy investors have made money, but we're cautious about CBRE. Here are three reasons why we avoid CBRE and a stock we'd rather own.
Why Do We Think CBRE Will Underperform?
Established in 1906, CBRE (NYSE:CBRE) is one of the largest commercial real estate services firms in the world.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, CBRE’s 8.3% annualized revenue growth over the last five years was sluggish. This was below our standard for the consumer discretionary sector. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
CBRE has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. On average, CBRE’s ROIC decreased by 3.7 percentage points annually 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
We cheer for all companies serving everyday consumers, but in the case of CBRE, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 26.9× forward EV-to-EBITDA (or $139.81 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at FTAI Aviation, an aerospace company benefiting from Boeing and Airbus’s struggles.
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