JLL - Jones Lang LaSalle: Focus On The Long Term (Rating Upgrade)

2023-07-31 16:54:01 ET

Summary

• Jones Lang LaSalle Incorporated is expected to witness margin contraction and earnings declines for FY 2023 due to a difficult macroeconomic environment.
• But Jones Lang LaSalle's growth prospects for the long run are pretty good, as seen with its consensus FY 2024-2027 EPS CAGR of +19.7%.
• I raise my rating for Jones Lang LaSalle stock to a Buy, as its 0.64 times PEG ratio implies that the company's strong long-term financial outlook isn't priced into its shares.

Elevator Pitch

I award a Buy investment rating to Jones Lang LaSalle Incorporated ( JLL ) shares. Earlier, I wrote about JLL's profitability outlook, the company's capital allocation approach, and its creation of a new CTO (Chief Technology Officer) position in my article published on May 22, 2023.

My attention turns to Jones Lang LaSalle's long-term prospects and valuations in the current update. The market values JLL at a forward P/E multiple in the low teens, but its long-term earnings CAGR is close to 20%. Therefore, JLL is an attractive investment choice if one focuses on the long term, so I have chosen to upgrade my rating for the stock from a Hold earlier to a Buy currently.

Jones Lang LaSalle Incorporated is currently scheduled to report its Q2 earnings pre-market on Thursday, August 3rd.

Look Beyond Short Term Challenges

The near-term financial outlook for JLL is bleak, but the company has significant potential for revenue growth and profitability in the long run.

The current Wall Street analysts' consensus financial forecasts point to Jones Lang LaSalle's normalized earnings per share or EPS falling by -21.5% from $15.71 in fiscal 2022 to $12.33 for FY 2023. The sell-side's bearish expectations relating to JLL's financial performance for the current year are consistent with the company's financial guidance. Jones Lang LaSalle's management is of the view that the company's normalized EBITDA margin might potentially decrease from 15.0% for FY 2022 to 14.0% in FY 2023 as per the lower end of its guidance as indicated at its Q1 earnings call .

Considering that Jones Lang LaSalle's commercial real estate services business is largely dependent on the performance of global economies, it is no surprise that JLL's financial performance is most probably going to be poor in a challenging economic environment. But if one looks beyond the short term and considers the long term prospects, Jones Lang LaSalle becomes a very appealing investment candidate.

At William Blair's 43rd Annual Growth Stock Conference on June 8, 2023, JLL shared its financial goals for FY 2025. In specific terms, Jones Lang LaSalle aims to grow its yearly fee revenue from $8.3 billion in FY 2022 to $10-11 billion for FY 2025. Also, JLL sees the company's non-GAAP adjusted EBITDA margin improving from 15.0% last year to 16%-19% by FY 2025. Jones Lang LaSalle's favorable financial targets are aligned with the analysts' optimistic financial projections. Consensus data sourced from S&P Capital IQ indicates that JLL's normalized EPS is expected to expand by a CAGR of +19.7% for the FY2024-2027 period.

Top Line Growth

I have identified three major factors that should be supportive of Jones Lang LaSalle's top line growth for the long term.

Firstly, there is the potential for JLL to grab share away from smaller and weaker peers as the commercial property services market consolidates over time. Jones Lang LaSalle noted in its presentation at William Blair's recent June 2023 investor event that the five largest commercial real estate services company in the world only accounted for less than 30% of worldwide property investment sales last year as per Real Capital Analytics' data. It is natural that an increasing number of companies will choose to work with large property services businesses such as JLL which have a global presence and diverse product & service offerings.

Secondly, Jones Lang LaSalle is a beneficiary of growing urbanization. As more people live and work in cities, there will be greater demand for JLL's real estate-related services. According to The World Bank's forecasts , the global urbanization rate is projected to rise from 56% currently to slightly under 70% in the next two and half decades or so.

Thirdly, JLL's Work Dynamics business, which engages in facility & project management, has a very long growth runway. At the June 8, 2023 William Blair conference, Jones Lang LaSalle revealed that "the win rates (for its Work Dynamics business) we had over the last 5 months have been the highest in the history of the company." Despite the fact that its Work Dynamics business had exhibited positive growth momentum, JLL is far from scratching the surface of this business' true growth potential. There are two key metrics are worth paying attention to. The first metric is that a mere 30% of corporates have currently turned to third party property services providers for real estate management. The second metric is that the top five commercial property services companies in aggregate only enjoy a 5% share of the worldwide real estate outsourcing market now.

In conclusion, JLL's target to expand its fee revenue from $8.3 billion for fiscal 2022 to $10-11 billion by FY 2025 appears to be achievable, taking into account the multiple growth drivers highlighted in this section.

Bottom Line Expansion

Both the management's comments and the market's consensus estimates point to Jones Lang LaSalle expanding its earnings in the future.

One key driver of JLL's profit growth is the expense optimization measures that it has undertaken. Jones Lang LaSalle had earlier noted at its first quarter results briefing that the "global realignment of our business lines" targeting "non-revenue generating roles" have translated into "$140 million in annualized cost savings" which will take effect starting in Q2 2023.

Another key driver of the company's EPS increase is its capital allocation strategy. As per the company's management commentary at the William Blair investor conference in June, JLL will continue to focus on deleveraging (0-2 times net debt-to-EBITDA long term target) and share buybacks ($1.2 billion of share repurchase authorization remaining) in the foreseeable future. Debt paydown will reduce Jones Lang LaSalle's interest costs; while share repurchases will help to lower JLL's share count and support EPS growth.

Valuations

Jones Lang LaSalle's shares are undervalued based on its current price/earnings-to-growth or PEG valuation multiple of 0.64 times, which is significantly below 1 times (a yardstick for fair valuation).

As I mentioned earlier in this article, Jones Lang LaSalle's consensus FY 2024-2027 normalized EPS CAGR is +19.7%. In comparison, JLL is now valued by the market at consensus forward next twelve months' normalized P/E multiple of 12.6 times. My 0.64 times PEG ratio for JLL is calculated based on dividing its current P/E by its earnings CAGR.

Closing Thoughts

A buying opportunity associated with JLL's stock has emerged as a result of the challenging 2023 outlook for the company. Jones Lang LaSalle's current P/E is substantially below its long-term earnings growth estimate, and this suggests that Jones Lang LaSalle Incorporated stock is deserving of a Buy rating.

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