3 Reasons CSGP is Risky and 1 Stock to Buy Instead

CoStar’s 14.2% return over the past six months has outpaced the S&P 500 by 7.7%, and its stock price has climbed to $88.47 per share. This run-up might have investors contemplating their next move.

Is there a buying opportunity in CoStar, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is CoStar Not Exciting?

We’re happy investors have made money, but we don't have much confidence in CoStar. Here are three reasons why 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 3.7% annually over the last five years while its revenue grew by 14%. 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 13.8 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. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. CoStar’s free cash flow margin for the trailing 12 months was 2%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

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. Over the last few years, CoStar’s ROIC has unfortunately decreased significantly. 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 doesn’t pass our bar. With its shares beating the market recently, the stock trades at 82.4× forward P/E (or $88.47 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of CoStar

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