When I told some peers that I thought RLGY might be worth over $40/share, I was told I was nuts. The secular pressure on commission splits was too much to overcome… Realtors are going to be replaced with the internet…. RLGY is losing share… blah blah blah…

OK it is too early to celebrate and all those arguments haven’t been proven wrong yet, unfortunately. But the important thing is that RLGY had a good Q2’18. The company posted $276MM of EBITDA compared to estimates of $268MM. The main reason for the beat unfortunately was some of the more non-core segments like Cartus, the relocation business. NRT, the owned brokerages underperformed again and EBITDA was down 22%, from $78MM to $61MM. The company expects split pressure to moderate in the 2H, but this seems to be a clear issue.

On the flip side, when looking at Realogy from a behavioral standpoint… every one is trying to avoid the company. It is unloved and the split pressure is known. To me, if they perform moderately better than expected (and continue to buy back stock with their tremendous FCF) then we as investors will do OK, though there may be some significant volatility.

RLGY still trades at 8.7x 2019 EBITDA, which seems too low to me given the cash flow here. Taking a look at another franchisor, Dine Equity (franchises IHOP, or IHOB, and Applebees) is undergoing significant pressure and trades at 10x 2019 EBITDA.

I’m sticking with it… Heck, given all the LBOs that have occurred recently and the enormous war chest PE firms have gathered,  I wouldn’t be surprised to see someone try to re-LBO RLGY. I know, I know, that is a weak argument, but you never know.

-DD