2 Wide-Moat Stocks to Build Space For

Todd Lukasik: A recent research project on the commercial real estate industry prompted us to upgrade our views on two of the largest firms we cover, CBRE Group and JLL, also known as Jones Lang LaSalle. Consistent and reliable data in this industry is hard to come by, so we looked at a variety of data sources to piece together information to help us size the markets. We came to the conclusion that both firms combined have less than a 15% share of the traditional brokerage market of leasing and sales, and less than a 5% combined share of the corporate facilities outsourcing market. We think both firms still face very good growth opportunities, despite the fact that for over a decade they've grown at average double-digit rates.

In addition to being the largest firms, we think both CBRE Group and JLL are the best-positioned firms in the industry. We recently upgraded their moat ratings to wide from narrow. We think they have strong competitive positions based on the benefits of their global operating platforms, which provide benefits of scale, their respected brands, and, increasingly, customer-switching costs, especially in the corporate facilities outsourcing business.

Although cyclicality remains an issue over short time frames, we think the favorable long-term growth dynamics of the industry are more important to long-term investors. Another reason why cyclicality is becoming less of an issue for these firms is the growing importance of the corporate facilities outsourcing market, which benefits from long-term contracts and high renewal rates, which results in more stable cash flows over time. We recently changed our fair value uncertainty ratings for both CBRE Group and JLL to medium from high.

Today, neither CBRE nor JLL trades at a discount to our fair value estimates, so we'd encourage investors to wait for a more attractive entry point. But given the favorable growth dynamics of the industry and the strong competitive positions of both of these firms, we'd suggest that they're both good firms to keep on the radar in case the market offers more attractive entry points in the future.