Tuesday, December 15, 2015

Evercore Partners (Ticker: EVR): Neckties and Wildcattin’ in Texas

Evercore Partners (Ticker: EVR): Neckties and Wildcattin’ in Texas
By: Ryan Johnston, student at Marquette University
 
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Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary
• Evercore has had a fantastic year brining new talent into the firm. They have brought on approximately 15 new deal makers. Each Senior Managing director adds about 10 million to revenues once fully ramped.
• Surprise, surprise; Wall Street was wrong for punishing Evercore’s purchase of International Strategy and Investment (ISI) in October of 2014. The acquisition has had a synergistic effect on the firm’s underwritings; approximately 10 so far this year compared to only 5 for all of 2014.
• U.S. economy keeps chugging along, Fed is about to increase rates, and easy money policies are still occurring in Europe; all of these factors equate to a rich M&A environment.

Evercore Partners. (NYSE:EVR) Since initiating coverage on Evercore during late September 2015, fundamentally not much has changed at the firm level. The largest change is Evercore striking a deal with Mizuho Bank, which held all of the firm’s debt. Evercore offered roughly 5 million of its shares to erase its small debt load. Of the five million, 3 would be sold to the public, which Evercore would buy back about 2.5 million and Mizuho would hold the remaining 2 million. Also apart of this deal, Evercore formed an alliance with Mizuho to help encourage and simplify deals between the two firms in Japan. Overall, the deal is a positive step and the stock has been up approximately 10% since.

There has been concern over how much new talent the firm has hired. In a typical recruiting year, the firm hires/promotes 5-7 new Senior Managing Directors (SMDs). This year has proved to be an outlier with how many new deal makers have been brought on. In their second quarter conference call Schlosstein, Evercore’s CEO, likened the firm’s hiring practices to “wildcatting in Texas”. He said, “You drill a bunch of holes and you can have a bunch of dry holes or you can hit a couple of active wells. At this point we’re in the drilling stage.” This rhetoric carried foreword to Evercore’s third quarter conference call where Schlosstein said, “It’s very simple. I look at a great banker the way I look at a nice tie. If I see it, I buy it whether I need it or not.” At the end of the day, this shows the firm does not believe this abnormal year for hiring will be burdensome. I would become wary if the average SMD efficiency were to substantially drop or if their compensation ratio were to pop above 60%. Like Schlosstein said, “Great bankers will figure out a way to make money.”

As for some final housekeeping items, the ISI team has remained intact since Evercore purchased it back in October of 2014. I had some concerns over the firm being able to keep the ISI team onboard and happy. When Evercore acquired ISI, there were protective covenants put in place to tie the performance of the unit to the deal. If performance were to begin to taper off before 2020, Evercore could break off the purchase or have recourse against ISI’s former owners. Overall, ISI has been functioning properly and has provided the synergistic effect of adding more equity underwritings.

Lastly, 2016 is going to be a rare year for Evercore because investment banks will benefit from advising on both M&A and restructuring deals. This will be caused by turmoil in E&P where with oil hitting mid-thirties for a barrel will wreak havoc on producers and will end up leading to consolidations and debt restructurings. Also, the firm will still benefit from a stable M&A environment. Recently and most notably, Evercore was named an adviser for Dow Chemical, in the Dow-DuPont merger. The deal has been valued at over $130 billion and will lead the two firms to be broken up into three units.

What has the stock done lately?
Since the Domestic AIM fund initiated coverage, the stock has closed as high as $59 on November 6, 2015. This was following third quarter results that reinforced strong M&A and underwriting earnings. Since then, Evercore has established a trading range of roughly $54 - $56, which is up 10% since the fund added it in late September.

Past Year Performance: Year-to-date the stock is only up 2.22%, which after constructing a DDM and P/E multiple, shows the firm is trading at a 22% discount. Assumptions behind this value are increased deal flow because of a larger-than-average recruiting year, and increased synergies from the purchase of ISI. Underlying these two assumptions is the U.S. economy remaining stable to foster a healthy M&A environment. I believe these assumptions are totally within reason and should be fully baked into the stock price in the next one to two years.

Source: FactSet

My Takeaway

With Evercore’s stud management team partially consisting of Ralph Schlosstein and Roger Altman, who have sturdy roots in the investment banking industry, as well as ties to the U.S. government, I feel very safe and at ease investing in their firm. They have demonstrated time and time again they understand where the investment banking industry is going and how to be a name-brand player with a small cap firm. Because of aforementioned catalysts, I believe this has a conservative 20% upside, with plenty of room for new drivers to develop making it a high-quality play in a cyclical industry.

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