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Evercore (NYSE:EVR) is driven mostly by advisory activity. The SMD rank is growing, mainly from inside promotions, and comp ratios remain elevated with lagged compensation from previous periods, but there is sequential strength in dealmaking activity.
We have concerns. We think that there is a chance all of this is a false dawn. On the other hand, we think that restructuring will pick up and EVR has a franchise here, we think around 10% of MDs might be dedicated to restructuring.
On balance, however, we think that restructuring will not be enough to offset the danger of a false dawn in M&A, and that the mid-market is going to absorb this activity and not EVR as much, which is a veritable high-ticket player. Close to all-time highs, and with limited strength in markets even if its recovery will be consistent, i.e., this isn’t a false dawn, EVR does not look especially compelling.
Earnings
Sequential improvements are notable, and net income declines YoY are limited to around 41%, which isn’t too bad considering innate operating leverage in the business.
Our third quarter adjusted net revenues of $576 million declined 1% versus the third quarter a year ago, but were up 14% sequentially.
… In investment banking, third quarter adjusted advisory fees of $468 million declined 4% year-over-year compared to $489 million of advisory fees in last year’s third quarter. Sequentially, advisory revenues were up 25%
The other segments can be put aside for now, since advisory is 80% of the business.
The company is also saying that they are growing the SMD rank, although there is turnover here with some people being shifted out so there has been a net refuse in SMDs, but partners have grown, as has overall headcount by 14%:
We’ve promoted 24 people to SMD internally in the last two years and as you as you know this year we’re hiring from the outside 11.
John Weinberg, CEO of EVR
Partner headcount is up 28%, and as a note, we recall some years ago restructuring headcount was about 10% of the total, which is pretty normal. Lazard (LAZ) we recall is maybe around 15-20% in advisory.
Before getting into restructuring, the company comments that there has been a pickup in dialogue, and this may materialise into larger revenues, but not yet as the whole industry has had a bad Thanksgiving season. All vague backlog metrics are apparently up, we are told, and sequentially things do look good.
However, dealmaking recovery can be slower than expected to recover. Lazard was quite candid about this. Indeed, the recovery was slow in 2008.
There is also the risk of a false dawn in our eyes. A lot of activity was deferred from previous quarters, where the dealmaking refuse was around 50% by industry averages until recent sequential performance. Activity such as capital raising, and other larger transactions that depend on a less volatile credit environment and more easily anchored credit expectations, may just be picking up after a period where a expect-and-see approach was needed, but a proper recovery in line with the cycle may not be starting now since there are still many questions about the state of the economy.
It doesn’t help that in the US, sponsors are still affected by very high rates, and everyone is waiting for a soft-landing to deploy capital, which may not come.
However, there are also strategic segments, and some very large deals have come back.
we’ve advised on several transformative transactions including notably this week Chevron $60 billion acquisition of Hess and in the quarter WestRock on its $20 billion merger with Smurfit Kappa, Danaher on its spin-off of Veralto, as well as Bristol-Myers Squibb’s $4.8 billion acquisition of Mirati.
John Weinberg
TMT and energy are quite significant strategic areas, but also sponsor activity may start coming back in Europe as the rate situation seems to have more definitively peaked there, where inflation is on the way down (2.3% in Germany). Things are definitely not going to get much darker in M&A than they are now. But there are questions about whether adding all this talent, especially at high levels, may be somewhat premature.
There’s also the matter of restructuring. Some of the more basic out-of-court restructurings are picking up, liability management, and such, which is a positive. Moreover, there are substantial numbers of zombie companies in the economy, and the charge-offs for things admire commercial real estate loans have just started despite meaningful distress, meaning credit events could start happening in real estate to the benefit of restructuring activity. Also, the maturity walls of 2024 and 2025 are a real concern. High-yield borrowers are running out of time on their current fixed low-rated bonds.
The issue is so much of this distress is focused in the mid-market, where Evercore may not be the best positioned to make deals of comparable ticket sizes to previous periods.
Bottom Line
Of course, it’s also possible that things will recover on a nice, straight-line basis as people see more certainty and come back to the market. We don’t think things are more certain, we think they have actually never been more uncertain in this latest phase of the cycle, where economic slowdown is becoming somewhat more apparent, but inflation is still stubborn and possibly sticky.
Regardless, we don’t want to buy EVR as it almost touches on 2021 highs.
