Deutsche Bank is downgrading CoStar Group (NASDAQ:CSGP) to Sell from Hold on their revised estimates that call for a prolonged period of declining fundamentals. Although revs growth was weak even before CRE trends turned (reported Feb 19), CSGP was able to maintain its rich valuation on outsized EPS growth. But with the bulk of operating leverage having run its course, further margin expansion may not be possible w/o re-acceleration in revs or outright restructuring. It follows that CSGP’s multiple could begin to contract materially as mkt sees that recovery is a long way off, or that further downside risk to #s exists.

Recapping the quarter
CSGP recorded its first-ever sequential revs decline (-1.5% QoQ) as unfavorable FX (-2%) compounded the impact on a macro-led slowdown in the core business. 4Q08 revs missed guidance (+0 to 1% QoQ), our estimate (by $400K), and the Street ($600K). Deutsche also notes full year revs growth (+10%) came in well below the original +14-16% guidance and is already aligned with post-9/11 downturn levels. GAAP EPS of $0.38 were $0.02 above us due to sharply lower selling & marketing expenses (+$0.05), even as higher COGS (-$0.02) and lower interest income (- $0.01) precluded some of this upside.

Believe the stock is fairly valued at $20
At 15x fwd EPS (ex-cash), CSGP trades at a sizeable premium to other subscription-based businesses that in firm's view do not share the same addressable market concerns. Deutsche's new $20 price target values the core business (ex $11/share in cash) at 9x 2009E EPS of $1.00.

Notablecalls: CoStar acts as a clearinghouse for pertinent information in the commercial real estate market. This probably means things are not getting any better for CSGP in the near-term. Deutsche's Sell rating and $20 tgt should create some downside for the stock.

I'm guessing CSGP will go below the $27 level today, possibly testing the 52-wk low.