Real Matters Inc. (TSX:REAL, Financial) is a real estate technology company for the mortgage lending and insurance industries in the U.S. and Canada.
The company is focused on providing real estate appraisal, insurance inspection and title services through its Solidifi and iv3 brands to the mortgage lending industry in the United States and Canada. Its technology-based platform creates a competitive marketplace where independent field professionals, including appraisers, real estate agents, property inspectors, notaries, abstractors and other closing agents compete for volumes provided by its industry clients based on their performance and professionalism (the platform). Its clients include mortgage lenders in the United States, five Canadian banks and some of North America’s insurance carriers.
The company went public in 2017 and became a pandemic darling due to the massive increase in real estate transactions and refinancings, but is now facing a bust as interest rates start to normalize and the real estate market anticipates reduced volumes. However, the bust, like the boom before that, is going to extremes.
I wrote about this company about three months ago and invested in the stock in December. However, the stock did not appreciate and has continued to get cheaper. This note is to reappraise the situation and decide if I should add more, hold or get out completely.
The company's main segments include appraisal management and title and closing. The Canadian company has a market cap of 435 million Canadian dollars ($342 million), a trailing price-earnings ratio of 13.41 and a forward price-earnings ratio of 19.48.
Real Matters revenue growth has slowed down in the last year, but the company is profitable and free cash flow is positive.
The company has a solid balance sheet with no long-term debt and minimal liabilities.
The following diagram presents the company's operating cash flow. While 2020 appears to be an outlier, the company is generating solid free cash flow and free cash flow yield of about 10% on a trailing 12-month basis.
Valuation
The company bought back over 10% of its stock over the past year and continues to buy back shares. Insiders have also been robustly buying shares. This indicates that the shares are undervalued.
The GF Value Line shows the stock is so much undervalued that it is triggering a "value trap" warning. However, I don't think this is warranted in this case as the company is lapping an outstanding (and outlier) year. The GF Value indicates an intrinsic value of $17.86.
The GuruFocus valuation panel also shows undervaluation using the projected free cash flow and earnings power value method.
Conclusion
While the stock continues to drop, I would argue the market has overreacted to the real estate slowdown. The company's price-sales ratio is now below the 2018-19 level even though revenue is 50% higher. It takes time to land a new client, but once added as a customer, the relationship tends to be sticky and the company's platform becomes part of the customer's process.
Even if we were to ignore the aberrant pandemic period, the company has made decent progress on fundamentals. The following chart compares the company's quarter-to-quarter performance from the same quarter two years ago (thus skipping the pandemic period).
| Ticker | Earnings Yield (JoelGreenblatt) % | ROC (Joel Greenblatt (Trades, Portfolio))% | FCF Yield % |
| TSX:REAL | 14.43 | 185.84 | 9.96 |
The company is profitable with an excellent balance sheet and has free cash flow yield of about 10%. Multiple valuation methods indicate a stock value far above its current price. Joel Greenblatt (Trades, Portfolio)'s earnings yield and return on capital is exceptional. I don't think my thesis is wrong and I will continue to add to my position with the expectation that the market will eventually recognize this little gem.
