KBW Sees RE/MAX As 'Attractive Franchise Stock,' But 'Valuation Keeps Us On Sidelines'

While Re/Max Holdings Inc (NYSE: RMAX) has a recurring revenue, high margin business model with good capital flexibility, most of the company’s positives appear already priced into its current stock valuation.

Bose George of Keefe, Bruyette & Woods initiated coverage of Re/Max Holdings with a Market Perform rating and price target of $34.

Attractive Business Model

According to George, “RMAX has an attractive franchise business model. Almost all the company’s revenues are earned from its franchises.”

In addition, about 60 percent of the company’s 2015 revenues were recurring in nature, while not directly driven via agent sales volume.

Related Link: EXCLUSIVE: RE/Max CEO And CFO Explain Low Guidance, Say Co. Isn't Rate-Sensitive

George expects Re/Max Holdings to continue to achieve EBITDA margins of about 50 percent, and pointed out that the company has a robust history of growing agents.

Since the beginning of 2013, the company has increased its agents in the United States and Canada at a CAGR of about 4 percent.

In addition, the company has also been re-acquiring franchises in independently owned regions, which could lead to an increase in franchise revenue of 70–85 percent for the re-acquired franchises.

Pricing Power

George also pointed out that Re/Max Holdings has “ome pricing power with its agents and has increased fees over the past several years. RMAX generates solid free cash flow due to its high margins, limited capital expenditures, and low leverage.”

This helps the company return capital to shareholders, while also being able to fund growth. On the other hand, the low leverage offers flexibility to increase leverage whenever needed.