Evercore
Partners (Ticker: EVR): Neckties and Wildcattin’ in Texas
By:
Ryan Johnston, student at Marquette University
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.