In today’s report, Diligent Market Intelligence highlights key data points from CoStar Group’s vulnerability profile.

Corporate structure

CoStar Group provides online real estate marketplaces, information and analytics in the U.S. and U.K. The $31.6-billion market-cap company has two operating segments – North America and international – and its business portfolio comprises six business segments: CoStar, Information Services, Multifamily, LoopNet, Residential and Other Marketplaces.

As of June 30, 2023, the CoStar segment accounted for 37.8% of company revenue, Information Services 6.9%, Multifamily 37%, LoopNet 10.8%, Residential 2.1%, and Other Marketplaces 5.3%.

Peers and industry

CoStar operates in the real estate sector and the real estate services industry. The sector has accounted for 8.7% of activist campaigns so far in 2023, up from 6% in 2022, according to Diligent Market Intelligence’s (DMI) data.

Proxy peer Splunk was purchased by Cisco for $28 billion in September, just over a year after the company reached a standstill agreement with activist Hellman & Friedman that would allow the investor to view non-public information and make suggestions regarding the “business, strategy and finances” of the company. Splunk subsequently announced it will cut 7% of its workforce.

Proxy peer Verisk Analytics was targeted by D.E. Shaw Investment Management in March last year, following what it called a decade of underperformance due to operational missteps and poor capital allocation, and citing issues with the tenure of four of Verisk’s directors.

CoStar is part of DMI’s U.S. large-cap miscellaneous business services peer group. Several companies in the peer group have been targeted by financial activist investors this year, including FleetCor Technologies, which gave D.E. Shaw Investment Management a board seat in a settlement and FIS (formerly called Fidelity National Information Services), which reshuffled its management team amid pressure from Jana Partners.

Performance and valuation

CoStar’s stock has generated a 12-month total shareholder return (TSR) of negative 2.78%, versus a DMI-selected peer median of 12.85%. CoStar’s three-year TSR stands at negative 13.65%, versus a median of negative 6.54% for peers.

The stock trades at a price-to-EBITDA ratio of 49.72, versus a peer median 12.52 and a price-to-book ratio of 4.38 versus 4.07 for peers.

Financials

Revenue has grown at a three-year annual rate of 14.5%, versus 9.16% for peers. Earnings per share has grown at an annual rate of 12.97% over the past three years, from $0.60 in 2020, when business was dampened by the COVID-19 pandemic, to $0.75 in 2021 and $0.99 in 2022.

CoStar’s 80.55% gross profit and 16.86% net profit margins are in line with its median peer’s.

Selling, general and administrative (SG&A) costs are 53.7% of revenue, compared with 27.7% for the median peer.

With around $5.2 billion in cash on its balance sheet, CoStar’s excess cash to market capitalization ratio stands at 16.57% versus 7.28% for peers.

Corporate governance and management

CoStar currently has a governance score of 17 out of 20 on DMI’s Governance module, representing a generally shareholder-friendly governance profile.

Its corporate defense score is 4 out of 20. The company lacks some key activism defenses, such as not requiring supermajority votes for amending its bylaws, mergers or resolutions in an uncontested election.

The average tenure of the current CoStar board is 13 years, while the S&P 500 average is 7.7 years.

The minimum vote for directors at June’s annual meeting was 82.29%, compared with a median of 96.63% for all companies on DMI’s Vulnerability module.

Board Chairman Michael Klein faced 10.6% opposition at CoStar’s June 8 annual meeting. Allianz stated in its voting rationale: “The nominee is considered non-independent because of tenure on board of 12 years or more.” UBS Asset Management cited “a lack of two-thirds majority independence on the board.” Christopher Nassetta, chair of the nominating and corporate governance committee, faced 17.7% opposition.

Shareholder register

CoStar’s top shareholders are Vanguard, with a 15.9% stake, followed by BlackRock and Principal Financial Group, with 7.9% and 4.9%.

Partial-focus activist investors Artisan Partners, Farallon Capital Management and Marshall Wace own a combined 2.23% of the company. Fellow activists D.E. Shaw Investment Management, Twin Capital Management, Ancora Advisors, Wolverine Asset Management and The Sustainability Group all own toehold stakes.

The deadline to nominate director candidates for election at the 2024 annual meeting is March 25.

Conclusion

At the time of writing, the statistical likelihood of an activist investing in the company in the near-term, according to DMI’s proprietary vulnerability score, is high.

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