CoStar Group Inc. (NASDAQ:CSGP)

The financial performance, as measured by economic profit, demonstrates a consistent negative trend over the five-year period. While net operating profit after taxes (NOPAT) fluctuated, it was consistently insufficient to cover the cost of capital employed. Invested capital increased significantly throughout the period, exacerbating the negative economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$240.403 million in 2018 to US$333.240 million in 2019, representing a substantial gain. However, it then decreased to US$250.569 million in 2020 before recovering to US$362.411 million in 2021. In 2022, NOPAT declined again to US$321.495 million. Despite the fluctuations, NOPAT remained below the level required to generate a positive economic profit.

Cost of Capital

The cost of capital remained relatively stable, ranging between 15.11% and 15.72% over the observed period. A slight decrease was noted in 2021, but it increased slightly again in 2022. The consistency in the cost of capital suggests that the primary driver of the negative economic profit is not a change in financing costs, but rather the relationship between NOPAT and invested capital.

Invested Capital

Invested capital exhibited a strong upward trend. It increased from US$3,312.194 million in 2018 to US$3,711.336 million in 2019. A significant jump occurred in 2020, reaching US$6,661.421 million, and continued to rise to US$7,034.732 million in 2021 and US$8,182.919 million in 2022. This substantial growth in invested capital, without a corresponding increase in NOPAT sufficient to offset the cost of that capital, is a key factor contributing to the declining economic profit.

Economic Profit

Economic profit was negative in each year of the period. It started at -US$277.413 million in 2018 and progressively worsened, reaching -US$930.634 million in 2022. The increasing magnitude of the negative economic profit indicates that the company is destroying value, as the returns generated are insufficient to cover the cost of the capital employed. The trend aligns with the increasing invested capital and, despite NOPAT fluctuations, the inability of NOPAT to keep pace with the cost of funding the growing capital base.

In summary, the analysis reveals a concerning trend of increasing value destruction. While NOPAT experienced some growth, it was consistently overshadowed by the substantial increase in invested capital and the relatively stable cost of capital. This resulted in a consistently negative and worsening economic profit over the five-year period.

The financial data over the five-year period presents a mixed but generally positive trend in key profitability metrics.

Net Income

Net income showed a generally upward trajectory, starting at $238.3 million in 2018 and increasing to $369.5 million by 2022. A peak was observed in 2019 at nearly $315 million, followed by a decline in 2020 down to approximately $227 million, which may indicate the impact of adverse conditions during that year. The figure rebounded in 2021 with a substantial increase to nearly $293 million and further grew in 2022, reaching the highest level in the period analyzed.

Net Operating Profit After Taxes (NOPAT)

NOPAT also exhibited variability throughout the period but maintained an overall upward trend. It began at $240.4 million in 2018 and rose sharply to $333.2 million in 2019. Similar to net income, there was a decline in 2020 to $250.6 million. However, NOPAT increased markedly to $362.4 million in 2021, representing the highest value in the time series, before slightly decreasing to $321.5 million in 2022.

In summary, both net income and NOPAT demonstrate strong performance despite some volatility, particularly in 2020. The decline in 2020 could reflect external challenges faced during that time. The recovery and growth in subsequent years suggest resilience and improved operational efficiency, with net income reaching new highs by 2022, while NOPAT remains elevated above the initial years, indicating sustained profitability from core operations.

Provision for income taxes

The provision for income taxes shows a fluctuating trend over the five-year period. It increased significantly from 45,681 thousand USD in 2018 to 75,986 thousand USD in 2019. The amount then decreased to 43,852 thousand USD in 2020, followed by a sharp rise to 111,404 thousand USD in 2021. In 2022, it slightly increased further to 117,004 thousand USD. This pattern indicates volatility in the company's tax provisioning, with notable peaks in 2019, 2021, and 2022.

Cash operating taxes

Cash operating taxes also experienced considerable variability over the analyzed period. Starting at 39,802 thousand USD in 2018, there was a large increase to 65,509 thousand USD in 2019. The figure slightly declined to 60,078 thousand USD in 2020, then increased substantially to 94,697 thousand USD in 2021, and further to 142,190 thousand USD in 2022. This upward trajectory in recent years suggests growing cash outflows related to operating tax obligations.

Comparative insights

Both provision for income taxes and cash operating taxes exhibit a generally increasing trend from 2018 through 2022, despite short-term decreases in 2020. Notably, cash operating taxes have increased by approximately 257% over the five years, outpacing the increase in provision for income taxes, which rose by about 156% over the same period. The divergence, especially in 2022 where cash operating taxes exceed the provision by a substantial margin, may indicate timing differences, changes in tax payment schedules, or adjustments related to deferred taxes. This pattern warrants attention for cash flow planning and tax management.

Over the five-year period ending December 31, 2022, several notable trends are evident in the financial structure related to debt, equity, and invested capital.

Total reported debt & leases

This category initially decreased from 2018 to 2019, dropping from approximately $169 million to $150 million. However, it experienced a substantial increase in 2020, rising sharply to over $1.1 billion. Following this spike, the debt level remained relatively stable through 2021 and 2022, with minor decreases each year, concluding near $1.1 billion in 2022. This suggests a significant increase in leverage occurred in 2020, which then plateaued in subsequent years.

Stockholders’ equity

This component demonstrated consistent growth throughout the entire period. Beginning at around $3 billion in 2018, equity increased steadily each year, reaching approximately $3.4 billion in 2019, then accelerating to $5.4 billion in 2020. Growth continued in 2021 and 2022, ending at roughly $6.9 billion. This sustained increase indicates ongoing value creation for shareholders and a strengthening balance sheet in terms of equity financing.

Invested capital

Invested capital also exhibited a robust upward trend. Starting at about $3.3 billion in 2018, it rose gradually to $3.7 billion in 2019 before experiencing a sharp increase to over $6.6 billion in 2020. This growth persisted through 2021 and 2022, peaking at over $8.1 billion. The pattern mirrors the increases seen in both debt and equity, reflecting higher total capitalization and investment in company assets or operations.

In summary, the data reflect a strategic expansion in capital structure beginning in 2020, marked by a significant rise in both debt and equity, alongside a growing invested capital base. The escalation in reported debt and leases coincided with heightened equity levels, suggesting balanced financing efforts rather than reliance on debt alone. The steady increase in stockholders’ equity and invested capital signals stronger capitalization and potentially enhanced investment in growth initiatives during the analyzed period.

The economic spread ratio exhibited a consistent negative trend over the five-year period. Economic profit remained negative throughout the observed timeframe, while invested capital increased annually. This combination resulted in a declining economic spread ratio, indicating a widening gap between the company’s cost of capital and its return on invested capital.

Economic Spread Ratio

The economic spread ratio decreased from -8.38% in 2018 to -11.37% in 2022. This suggests that the company’s returns are becoming increasingly less profitable when considering the cost of its invested capital. The ratio’s consistent negativity indicates that the company is not generating returns sufficient to cover its capital costs.

Invested capital demonstrated a steady increase each year, rising from US$3,312,194 thousand in 2018 to US$8,182,919 thousand in 2022. Despite this growth in invested capital, economic profit continued to be negative and, in fact, increased in magnitude over the period. This suggests that the increased investment is not translating into improved profitability relative to the cost of that investment.

Economic Profit

Economic profit moved from -US$277,413 thousand in 2018 to -US$930,634 thousand in 2022. The increasing negative value signifies a growing shortfall between the company’s operating profit and its cost of capital. This trend is concerning as it indicates a worsening ability to generate value for investors.

The combined trend of increasing invested capital and decreasing economic spread ratio suggests a potential issue with capital allocation efficiency. The company is deploying more capital, but the returns generated from that capital are not keeping pace with the cost of obtaining it. Further investigation into the drivers of these trends is warranted.

The economic profit margin demonstrates a consistently negative trend over the five-year period. While negative economic profit is observed in each year, the magnitude of the loss increases significantly from 2018 to 2022.

Economic Profit Margin Trend

The economic profit margin begins at -23.13% in 2018. A moderate improvement is seen in 2019, with the margin increasing to -17.62%. However, 2020 marks a substantial decline to -46.33%, representing the most significant negative margin within the observed timeframe. The margin recovers slightly in 2021 to -35.69%, but then deteriorates further in 2022, reaching -42.51%.

The increasing negative economic profit margin suggests that the company’s returns are falling short of its cost of capital. The substantial drop in 2020 warrants further investigation to determine the underlying causes. While adjusted revenues consistently increased year-over-year, this revenue growth has not translated into positive economic profit. The continued negative trend into 2022 indicates that the issues impacting economic profitability have not been adequately addressed.

Relationship to Adjusted Revenues

Adjusted revenues increased steadily from US$1,199,321 thousand in 2018 to US$2,189,457 thousand in 2022. Despite this consistent revenue growth, the economic profit margin worsened, indicating that the cost of generating those revenues, or the cost of capital employed, is increasing at a faster rate than the revenue itself. This suggests potential inefficiencies in operations or a higher cost of funding.

The consistent negative economic profit, coupled with the declining margin, highlights a concerning trend in the company’s ability to generate returns exceeding its cost of capital. Further analysis is needed to understand the drivers behind the increasing costs and to assess the sustainability of the current business model.