The housing market has been afire for months, with historically low interest rates and tight supply helping to drive prices to new heights. Real estate agents and brokers profit from those rising prices in the form of higher commissions, so this would seem to be a bull market for stock in companies that franchise and market those brokers and agents, right?
Well, yes and no. Let's look at one of the most prominent, RE/MAX Holdings (NYSE: RMAX). Laying claim to top market share in the U.S. and Canada since 1999, RE/MAX lives off franchise and brokerage sales and fees and a growing agent salesforce. The company also has a new mortgage brokerage that is growing fast and promises to pump more funds back into the parent company. But is it a buy?
A tough quarter followed by some rebound
The pandemic took its toll on RE/MAX, especially in the second quarter, as the combined effects of shutdowns, financial support, and incentives helped drive down revenue and its stock price. RE/MAX had just hit a 52-week high of $40.78 a share when the coronavirus outbreak took hold and everything shut down. The stock plummeted to as low as $14.40 before recovering along with much of the rest of the market.
Now, with a summer home sales rally turning into fall, RE/MAX stock seems reasonably priced, especially against its fiscal performance. For instance, at $31.30 in Nov. 11 intraday trading, RE/MAX had a trailing price/earnings ratio of 31.27 and a forward P/E ratio of 21.05. As the Motley Fool points out in this article, that could mean the stock is undervalued by the market or that the lack of growth potential is really there.
That's surely a mixed signal and is based on the Denver-based company's recently issued revenue guidance of $69 million to $72 million in revenue for the fourth quarter, but let's look at year-end expectations compared to final figures for all of 2019.
RE/MAX finished 2019 with total revenue of $282.3 million and adjusted EBITDA of $103.5 million. For the full year 2020, the company now is projecting revenue of $262.5 million to $265.5 million and adjusted EBITDA in a range of $88.5 million to $91.5 million.
So, revenue and profit are expected to be down for the year. Again, not really a "buy" signal. But there are still some reasons to invest in this venerable brand.
Still paying dividends like a growth-and-income stock
For instance, the $0.22 a share RE/MAX declared in the third quarter was the fourth straight at that level and continued a string of quarterly payouts that began at $0.06 in 2014 soon after its IPO and more than 40 years after it was founded in 1973. That gives this stock a yield of about 2.6% compared with 0.34% for all real estate services companies and 3.98% as of Oct. 30 for the FTSE Nareit All Equity REITs index.
Of course, RE/MAX is no real estate investment trust (REIT), and like other non-REITs in this space, consider it a growth play. RE/MAX stock has been as high as the mid-$60s in 2017, and reasons for thinking it could get back there include its history of paying dividends, a powerful franchise, expanding mortgage brokerage business, and expectations of return on the investment it's making in new technologies for its sales force.
And about that sales force: By year's end, RE/MAX expects to have grown its agent count by 4.25% to 5.25% over 2019. Those are the people whose sales -- motivated by their own need to make commissions in order to thrive -- along with the market itself, drive the ultimate fate of this real estate sales engine that could, and probably can again.
Altogether, that makes RE/MAX a good candidate at this price level for a buy and hold.