CoStar Pairs a Wide Moat With Great Management
The real estate information provider is one of our favorites, but its stock looks pricey.
Morningstar covers roughly 1,700 companies; of these, just over 200 have wide Morningstar Economic Moat Ratings, fewer than 140 have competitive advantages we deem to be improving, and fewer than 140 have Exemplary Stewardship Ratings. CoStar Group (CSGP) is among an elite group of seven covered companies with all three--a wide moat, improving competitive advantages, and exemplary stewardship--making it one of Morningstar's favorite companies. Although we see a lot to like in CoStar's business, the shares trade at nearly twice our fair value estimate. We see more downside risk than upside potential in the stock.
Participants in the commercial real estate industry rely on accurate and timely data to perform their jobs. Lenders and appraisers require comparable sales data for underwriting and valuations. Brokers, property managers, and building owners require tenant information to track available space and tenant leasing needs. Roughly 1,000 researchers maintain CoStar's legacy database of information to support these functions, making upward of 120,000 updates to the database each day. All but its largest clients would be unable to replicate CoStar's research capabilities, and even commercial real estate service giants CBRE Group and Jones Lang LaSalle outsource large research functions to CoStar under multiyear contracts. By spreading the cost of its research staff and technology platform across a diverse client base, CoStar can price its service below the cost of collecting the data in-house. Its high customer retention rate (averaging 90% historically, with even higher levels recently) coupled with annual rate increases (usually in line with inflation) has led to a solid recurring revenue base that should increase modestly over time.
Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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