Thursday, May 22, 1997

Grubb & Ellis Co.
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Phone: 847-753-9010
Price (5/22/97): $12 1/4

HOW DID IT DOUBLE?

When The Motley Fool launched a message board to discuss Grubb & Ellis back in early February, AMargul309 was quick to post, "This thing has been making new highs weekly....Was supposed to be my secret small cap....I see that somebody else found out about it....I wonder if that is good or bad that it is now on this message board?"

Having almost doubled since the $6 5/8 price it was trading for then, and almost tripled from the $4 1/4 low the month before, AMargul309 and other Grubb & Ellis shareholders have found bigger and better things to wonder about than guarded secrets -- like what to do with their hefty gains.

Of course, it wasn't finding an army of online friends that helped the stock. As far back as December the company was lining up major offline believers. Back then it sold 2.5 million shares to hotelier Kojaian Companies for $4 a share. A month later it sold another 2.5 million shares to a Goldman Sachs subsidiary at $4 1/2. The two transactions helped spruce up its balance sheet by reducing long-term debt and eliminating preferred stock shares. Those companies, along with principal shareholder Warburg Pincus Investors L.P., gave the company plenty of deep pockets banking on its future.

As major deals with the likes of Chase Manhattan were announced and strong quarterly earnings were reported, the company had friends in high places with significant stakes in making sure the word got around.

BUSINESS DESCRIPTION

Grubb & Ellis is the country's second largest publicly traded full-service commercial real estate broker behind CB COMMERCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBCG)") else Response.Write("(Nasdaq: CBCG)") end if %>. Through its 91 offices in 64 cities, Grubb & Ellis services every major metropolitan area in the U.S. through its fully-owned Axiom subsidiary. It recently relocated from San Francisco to its new base in Northbrook, Illinois.

Grubb & Ellis/Axiom currently manages over 84 million square feet of facilities and commercial space nationwide with a total portfolio value of $8.6 billion. Last year the company completed over 13,000 transactions with a value in excess of $9 billion.

FINANCIAL FACTS

      Income Statement
      12-month sales: $217.6 million
      12-month gain: $6.2 million
      12-month EPS: $0.40
      Profit Margin: 2.8%
      Market Cap: $245 million

      Balance Sheet
      Cash: $13.1 million
      Current Assets: $23 million
      Current Liabilities: $13.4 million
      Long-term Debt: $12.5 million

      Ratios
      Price-to-earnings: 39.5
      Price-to-sales: 1.1

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Finding Grubb & Ellis in time for an elevator ride up the skyscraper would not have been easy. After issuing new shares to Kojaian in December and Goldman Sachs in January, this may have appeared to be a company in dire need of cash. With negative book value, the balance sheet refurbishment certainly warranted a little panhandling. However, getting in then was more of a speculative leap of faith.

There were more justifiable entry points along the way. The stock was at $7 3/4 on March 10, when the company announced a huge 10 million square foot management contract with Chase Manhattan. A month later the stock rose to $10 3/8 after a relatively strong fiscal third quarter report where operating losses for its seasonally worst period were trimmed from $5.2 million to just $373,000. While these fundamental improvements occurred with the stock a few floors higher, they still could have taken you up for the penthouse view.

WHERE TO FROM HERE?

With CB Commercial and Grubb & Ellis trading at 14 and 16 times 1998 earnings projections respectively, it is fair to say that Wall Street has a pretty uniform perception of what commercial real estate firms are worth relative to future earnings. Therefore, the key to Grubb & Ellis lies not only in how well its sector performs, but also in how well the company will perform within the industry.

It is, after all, a construction project in progress.

-Rick Aristotle Munarriz ([email protected])

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