FirstService’s revenue of $691.7 million, growth of 14.5% year-over-year, surpassed the consensus of $672 million and our $678 million estimate. Adjusted EPS of $0.97 also were nicely above our estimate of $0.91 as stronger revenue growth for FirstService appears to be driving operating leverage, which is a key component for our investment thesis on the stock. A lower tax rate also benefited EPS by roughly $0.02 versus our model.

The revenue beat versus the Street stems primarily from the Colliers segment. Internal revenue growth increased 14%, driven by strong gains in Europe and Asia-Pacific that benefited from solid volumes in investment sales, leasing, and consulting. The Colliers segment also demonstrated strong operating leverage, with adjusted EBITDA margin increasing roughly 250 basis points year-over-year, to 14.1%; this is the first quarter in memory in which the operating margin for Colliers was at or above its large commercial real estate peers.

Between the Colliers outperformance and the higher-margin services from the company’s franchise brands, profitability during the quarter again surprised to the upside. We expect both of these trends to continue as the economy recovers by benefiting commercial real estate fundamentals (tailwind for Colliers), improving consumer discretionary spending (tailwind for property services and management), and improving the housing market (tailwind for some of the franchise operations).

There were no specifics on product line growth within Colliers, but directionally we believe the Europe region led all geographies with strong double-digit growth in investment sales, primarily across Western Europe, with London leading other markets. The press release did not indicate any notable strength from the Americas regions, so we will look for an update on the company’s outlook for the U.S. market going into 2014.

Issues we will also be looking for on the company’s upcoming conference call will be: 1) management’s sentiment for the state of the commercial real estate recovery and how the revenue and margin growth trajectory may be affected; 2) expectations for the Colliers’s Western European footprint, especially with the recent tuck-in acquisition of Briant Champion Long, a retail property specialist in the United Kingdom; 3) expectations for pricing trends in property management in light of recovering property values; and 4) profit expectations from the franchise brands.

Stock Thoughts: Expectations for FirstService have drifted higher recently, but we view fourth-quarter results positively and supportive of shares moving higher. Management’s actions taken over the past few quarters to clean the company’s capital structure, sell underperforming assets, and begin building a stronger Colliers presence in Western Europe should keep margins and growth rates moving in the right direction, in our view. Our estimates are under review pending Wednesday morning’s conference call, but we will likely increase estimates modestly to account for stronger growth in Colliers given the favorable outlook we have on the commercial real estate market and what has probably been consistent headcount growth for the business.


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