Evercore Partners Is Banking On A Corporate Deal-Making Recovery

Investment bank Evercore Partners (EVR) is a mid-tier player in the lucrative mergers and acquisition market. During 2013, the company ranked 12th worldwide for completed transactions (17th in announced deals). This position puts the firm squarely in the middle of pack with a slim chance of someday catching up to larger global heavyweight like Goldman Sachs (GS) and Morgan Stanley (MS).

Yet Evercore can still benefit alongside the rest of the industry if the global M&A market starts to pick up steam. While economists and pundits are talking about this as a likely scenario in 2014, so far there is limited evidence to support that view. It is true that announced transactions for 2013 were up roughly ~2% versus 2012, but completed transactions for most of 2013 were down 2% versus 2012, so this type of variation in hardly something to get excited about.

Similarly, many commentators on CNBC and Bloomberg point to management discussion about the possibility of increased acquisitions and higher readings in CEO confidence from the Conference Board in December. Again, this kind of anecdotal information is good and might presage an upturn in M&A, but it's hardly definitive. And frankly you may color me skeptical, given the number of times since the Crisis that investors have been told a more robust deal making environments is coming.

None of this is to say that Evercore is not doing well, or that a severe deal-making drought is in the works. In fact, the firm's shares look fairly valued at today's prices to me. With the stock trading at more than 20X forward 2014 EPS consensus, it is hard to get enthused about an investment absent a much more robust economic backdrop.

To give you a little background on the firm, Evercore advises clients on mergers, acquisitions, divestitures. Clients for the firm mainly include big multinational corporations and private equity firms. The company also does some restructuring, securities underwriting, as well as limited equity research services.

Now I said at the start that EVR was unlikely to ever become a major investment bank challenger to the likes of Goldman and Morgan. The industry is simply too competitive these days and it's very difficult to pick up the needed scale to become a financial behemoth. Further given the regulatory scrutiny that now goes along with that status, who would want to? That does not mean that Evercore isn't a very successful firm, or that it won't continue to be successful. In fact EVR has a pretty incredible track record of picking up new business. Revenues have exploded up from $146 million in 2005 to (very likely) more than $750 million for full year 2013. Total assets and cash have followed a similar trajectory and the firm pays out a very reasonably dividend today (recently raised to $1.00/share annually), but net income growth has been more sporadic. Of course this is consistent with the boom and bust nature of the M&A market. This cycle is only exacerbated by the high level of total fee revenue that EVR generates from the US versus the rest of the world (or ROW).

Revenue	1Q	2Q	3Q	4Q	Year
2013	151.4	207.5	191.2	--	--
2012	102.8	172.5	157	214.1	657.7
2011	112.9	147.7	168.5	116.8	543.7
2010	93.44	70.77	129.4	107.6	401.7
2009	58.2	77.3	87.7	114.3	337.4
2008	50.5	67.2	65.7	41.5	224.9
EPS	1Q	2Q	3Q	4Q	Year
2013	0.16	0.44	0.36	E0.61	E1.57
2012	-0.12	0.25	0.17	0.56	0.89
2011	0.14	0.08	0.06	-0.02	0.27
2010	0.09	Nil	0.17	0.13	0.39
2009	0.01	-0.43	0.14	0.07	-0.10
2008	-0.08	0.16	-0.04	-0.39	-0.36

If nothing goes terribly wrong in 2014 (i.e. China doesn't have a major crisis, a Turkish implosion doesn't spread to Europe, etc), then EVR should earn perhaps $2.70 a share. Historically, when M&A cycles are in a significant upswing, boutique investment banks like EVR and Lazard (LAZ) trade at multiples as high as the upper 20's or even low 30's. It is possible therefore that the firm still has further to run despite nearly doubling in value over the last year.

Yet for significantly more multiple expansion to happen (the stock is already trading around 22X forward EPS), the market will probably need a much clearer and cleaner signal that the M&A market is indeed about to take-off. I'm not at all sure that signal is coming any time soon, and frankly it wouldn't take much to derail the markets hopes here. EVR did grow revenues ~16% in 2013 (exact figures won't be known until the firm reports Q4) and I think further revenue gains in the high single digits are realistic for 2014.

Investors should keep an eye on one key figure for EVR though; the company's backlog of pending transactions. Right now EVR does have some large assignments and the deal announcements on the firm's website do suggest the company could be picking up some market share. Yet this is coming at a price; EVR's compensation expense ratio is up to 60% versus an already lofty long-term level of 55%. Recruiting new talent and paying existing rainmakers more is OK if it filters through to investors, but with that ratio rising, I'm not sure the company is operating as efficiently as it should be. The investments in EVR's people need to payoff for investors in the form of revenue growing faster than compensation for that ratio to fall. Absent greater efficiency or a dramatic industry pickup then, I'm not sanguine about Evercore's stock price run continuing. Investors would do well to be cautious about putting new money to work at today's levels.

Source: Evercore Partners Is Banking On A Corporate Deal-Making Recovery

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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