December 31, 2008 - 1:41pm EST by
2008 2009
Price: 6.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 140 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Buffett has quietly amassed the second-largest real estate brokerage operation in the US. His penchant for the business model is likely driven by: a) easy to understand; b) high variable cost structure; c) de minimus capital requirements to maintain and grow the business; d) strong free cash flow generation; and e) homebuyers willingness to pay commission rates for expertise in a large financial decision. These qualities can be found in the largest Brazilian brokerage firm, LPS Brasil aka Lopes.
Lopes has been in the brokerage business since 1935 and controls over 30% of the brokerage market in Sao Paulo, a market that represents 40-50% of the Brazilian homebuilding business. With a dominant market share in Sao Paulo, the company’s competitive advantage is its strong local market knowledge and valuable database, which combined represents a strong moat in an area without an MLS-like system found here in the states. In the last few years Lopes has consolidated its position in the country by acquiring local players in different markets (much like Buffet’s HomeServices business). Acquisitions and greenfield startups have grown Lopes’ broker base to 7,269 brokers in the most recent period from 1,200 brokers two years ago. Additionally, the company has entered into the ‘economic segment’, those units priced below BRL 150k, and making forays into the secondary market.
The stock has fallen over 80% from its high of a year ago as investors correctly discount an uncertain environment for the residential real-estate segment in Brazil. Similarly, the largest Brazilian homebuilders are down 70%. The similar stock performance is unjustified, in my opinion, given that the homebuilding industry is capital intensive and inferior business models to Lopes.
With 49mm shares outstanding, Lopes has a BRL 323mm market cap. Net debt is 16mm, so enterprise value is 340mm. 08 EBITDA is tracking at 110mm, so EV/EBITDA is 3x. actual cash earnings are running 95mm in ‘08, implying a cash P/E of 3.4x. Obviously the market is discounting deteriorating earnings for future years. In fact, the most recent earnings report was a mixed bag with EBITDA margins falling below analyst’s estimates due to a slowing housing market, but still healthy at 31.2%.  I do feel that the next year will be tough sledding. However, even if total units sold drop by 1/2 Lopes should still earn BRL 130mm in revs and 46mm in adjusted EBITDA, which would place the stock at 7.4x EBITDA. I believe a double digit EBITDA multiple is warranted for a business with the characteristic highlighted in paragraph one, and therefore believe Mr. Market is providing investors with an attractive risk/reward for a business with Buffett-like characteristics.


Value is its own catalyst
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