What a brutal six months it’s been for RE/MAX. The stock has dropped 38.1% and now trades at $5.69, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in RE/MAX, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think RE/MAX Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in RE/MAX. Here are three reasons there are better opportunities than RMAX and a stock we'd rather own.
1. Weak Growth in Agents Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like RE/MAX, our preferred volume metric is agents). While both are important, the latter is the most critical to analyze because prices have a ceiling.
RE/MAX’s agents came in at 148,660 in the latest quarter, and over the last two years, averaged 1.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for RE/MAX, its EPS declined by 7.1% annually over the last five years while its revenue grew by 1.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict RE/MAX’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 9.7% for the last 12 months will decrease to 4.2%.
Final Judgment
We see the value of companies helping consumers, but in the case of RE/MAX, we’re out. After the recent drawdown, the stock trades at 4.2× forward P/E (or $5.69 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
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