We’ve gained 2,582.3% on FirstService and it still has plenty of room to grow

FirstService operates in the highly cyclical real estate industry, which adds risk. However, it’s a market leader and continues to make savvy acquisitions. That helps it attract and retain clients during economic slowdowns.

The firm remains one of our top picks as the stock trades at an acceptable 30.8 times the company’s 2024 earnings forecast.

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FIRSTSERVICE CORP., (Toronto symbol FSV) has two main businesses: FirstService Residential (46% of revenue) provides property management services, such as collecting monthly condominium maintenance fees, preparing financial statements, on-site security and property cleaning/maintenance services; and FirstService Brands (54%) offers a wide variety of property management services through several franchised businesses, including Paul Davis Restoration, CertaPro Painters, California Closets, Post Home Inspectors, Floor Coverings International and College Pro Painters.

The U.S. supplies 88% of the company’s overall revenue. The remaining 12% comes from Canada.

FirstService took its current form on June 2, 2015. That’s when former the previous FirstService Corporation completed a restructuring through a plan of arrangement, whereby FirstService’s Residential Real Estate Services and Property Services divisions were spun out into a new public company named FirstService Corp.

The former FirstService was then renamed to Colliers International Group, Inc. (symbol CIGI on Toronto).

Investors received one share of each firm in the transaction.

We recommended the original FirstService Corporation in our first issue of our Power Growth Investor newsletter (then called Stock Pickers Digest) in June 1998 at $19 a share.

After the split, 41.43% of the original share price cost was allocated to the new FirstService, and 58.57% to Colliers.

That means our recommended price for the new FirstService was $7.87 ($19 x 0.4143). The stock is now up a stellar 2,582.3% since then. (Colliers is up 1,287.6% from our recommendation at $11.13).

Meanwhile, in April 2020, we moved both FirstService and Colliers from Power Growth Investor to The Successful Investor, our publication for more conservative investors. The move reflected their new status as large-cap stocks and their established dividend histories.

Growth Stocks: Fragmentation-correcting acquisitions continue to fuel an expansion for FirstService

FirstService operates in a highly fragmented industry, so it tends to spur its growth with acquisitions.

For example, in April 2023, FirstService bought Crossbridge Condominium Services Ltd. for an undisclosed amount. That firm manages 450 condominium properties in 25 cities in Ontario. Crossbridge’s former owners will also continue to manage the business.

In December 2023, FirstService acquired a controlling stake in Roofing Corp. of America. Based in Atlanta, Georgia, this firm provides a variety of roofing services, including roof replacements and repairs, to commercial and residential clients. It operates in 11 U.S. states. FirstService paid $413 million for this stake of an undisclosed size. The new operations should add $400 million to FirstService’s yearly revenue of $4.3 billion.

And, most recently, in January 2024, the company acquired DryPatrol. That firm provides restoration from fire and water damage services in Dayton, Ohio. FirstService’s Paul Davis Restoration business also purchased its franchisees in Denver, Colorado, and southern Idaho. FirstService has not yet said how much it paid for these three businesses. However, they help strengthen its presence in these markets.

Growth Stocks: Revenue continues climbing on the back of a solid balance sheet

Thanks partly to acquisitions, FirstService’s revenue rose 94.0%, from $1.93 billion in 2018 to $3.75 billion in 2022 (all amounts except share price and market cap in U.S. dollars). In 2023, revenue rose 15.7% to $4.33 billion.

Overall earnings before unusual items jumped 112.8%, from $95.4 million in 2018 to $203.0 million in 2021. Due to more shares outstanding, per-share earnings improved at a slower pace of 75.1%, from $2.61 to $4.57. The company borrowed the funds it needed to pay for its acquisitions. As a result of higher interest costs, earnings fell 7.1% to $188.6 million, or $4.24 a share, in 2022. In 2023, earnings climbed 10.7%, to $208.8 million, or $4.66 a share.

In 2023, FirstService spent $547.2 million on acquisitions. Those new businesses helped lift its revenue in the quarter ended December 31, 2023, by 5.8%, to $1.08 billion from $1.02 billion a year earlier. However, due to fewer weather-related restoration projects, earnings fell 9.0%, to $1.11 a share from $1.22.

FirstService’s balance sheet remains strong: it ended the quarter with cash of $187.6 million, while its long-term debt of $1.1 billion U.S. is a moderate 20% of its market cap.

Growing rapidly through acquisitions involves special risk. Debt can rise quickly. When an acquisition goes sour, the buyer faces heavy goodwill write-offs which can devastate earnings. What’s more, as potential acquisition candidates get scarcer, the temptation could be to move outside of areas you know well into new areas.

As mentioned, FirstService operates in a highly fragmented industry, so it tends to fuel its growth with acquisitions. However, it cuts the risk of this strategy by focusing on smaller businesses that expand its market share and geographic reach. Moreover, many of the former owners continue to run their businesses. That lets FirstService utilize their local knowledge and expertise.

The company also focuses on businesses that offer an essential service, enjoy a high proportion of recurring revenue and have low capital intensity and high cost-variability. The business must also be labour intensive, so that it can profit from one of the company’s key strengths: the ability to effectively manage and motivate a work force.

All in all, the company’s outlook is strong. Its strong brands and dominant position in niche markets gives it an edge over its competitors.

FirstService’s earnings will probably rise 3% in 2024 to $4.82 U.S. a share. The stock trades at a high but still acceptable, 30.8 times that forecast. The company is also raising your dividend by 11.1%.; the new annual rate of $1.00 yields 0.6%.

Recommendation in The Successful Investor: FirstService Corporation is a buy.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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