With conference season kicking off this week, we wanted to share a few files that we thought might be helpful. The first is our Question Bank, which includes both company specific and general questions for all of the firms in our coverage presenting and/or participating in 1x1s. We also included some Guidance Tearsheets which compare our modeled forecasts to each piece of company guidance in an easy-to-read format. Please feel free to use us as a resource in case you need anything ahead of your meetings.
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This week our WR Diversified Banks & Brokers Index was up +10bps, trailing the broader market (+160bps) but tracking largely in line with the S&P Fins. (+10bps). We saw meaningful dispersion in terms of share performance as the Retail Brokers and M&A firms were powered by strong 4Q results / favorable guidance, with LPLA (+7%) and EVR (+6%) clear standouts. The biggest laggards this week were the asset sensitive banks and capital markets firms, including BAC (-4%) and MS (-3%). While bank / broker shares took a breather this week, YTD performance has been strong, particularly at those firms which underperformed by a wider margin in 4Q18 but reported strong results including EVR (+26%), LPLA (+23%), and Citi (+22%), while mixed 4Q results have weighed on performance at JPM (+6%), WFC (+6%) and MS (+5%).
EVR reported 4Q EPS of $3.93 earlier today (01/30/19), meaningfully above our estimate of $2.23 and cons. of $2.18 (see published first look) and driving shares up +8.5% on the day (800bps O/P vs. S&P Fins.). In our view, risk / reward for EVR continues to improve, as 4Q results support as much as ~10% upside to cons. and reinforces our preference for EVR vs. LAZ (see 2019 Outlook). However, conversations with investors suggest that the magnitude of 4Q beat actually raised some concerns as to the “forecastability” of EVR revenues given a lack of more detailed disclosures on the contribution from ancillary businesses (i.e., outside of traditional Advisory and Restructuring). The fact that shares outperformed by only 8% also suggests that investors are skeptical of the sustainability of strong 4Q results, as cons. estimate revisions so far have been much stronger (+14%). While EVR has made it clear that such disclosures will not be provided, we sympathize with investors and agree that barring improved transparency on revenues, shares will likely continue to trade at a multiple discount vs. both independent M&A peers and its 5-year average P/E of 15x.
EVR reported very strong results this quarter with 4Q EPS of $3.93, above our $2.23 and cons. of $2.18. Vs. our estimate, the beat was driven by record Advisory fees (+$1.48), better comp leverage (+$0.48), and lower sharecount (+$0.11), partially offset by higher non-comps (-$0.30) and minority interest (-$0.04). Results included some changes to the accounting presentation reflecting higher revenue gross-up with commensurate increase in expense, but these adjustments were neutral to earnings (see link for detailed historicals, pg. 2 for detailed earnings variance). Bottom Line: While EVR shares have been very strong out of the gate in ‘19 (>1,100bps outperformance vs. S&P), we see further runway as the company meaningfully exceeded our estimates (and cons.). Looking beyond 4Q, trends are fairly encouraging as backlog remains robust (+42% YoY vs. -7% for the industry) even with a high bar for 1Q19 cons. While late-cycle bears will argue this result may be as good as it gets for EVR (and M&A peers), consistent with our recent upgrade (see 2019 Outlook), risk / reward is improving even under a late-cycle valuation framework, supporting our relative preference vs. Lazard. Valuation is also undemanding with shares trading at <10x core 2018 EPS of ~$8.60 (excluding 1Q18 tax benefit) and consensus / shares poised to move higher following today’s result (1/30/19).
This week our WR Diversified Banks & Brokers Index was down modestly (-30bps), largely in line with the S&P Fins. (flat) and the broader market (-20bps). Share trends over the last week were quite bifurcated, with STT (+2%), AMTD (+2%), Citi (+1%), and BAC (+1%) the relative winners and ETFC (-6%), EVR (-2%), and MS (-2%) the laggards. That said, YTD performance remains quite strong, with our index outpacing the S&P 500 by ~700bps. Citi (+23%), BAC (+20%) and GS (+20%) have been clear winners so far, while LAZ (+5%), JPM (+6%), and MS (+8%) have been the relative laggards. As we approach the end of 4Q earnings season, we wanted to highlight some key debates on select stocks:
This week our WR Diversified Banks & Brokers Index was up +7%, slightly outpacing the S&P Fins. (+6%) but tracking well ahead of the broader market (+3%). The move higher was led by broad-based strength across the group, with GS (+14%), BAC (+13%), Citi (+11%), and BK (+10%) the clear winners following encouraging 4Q results / commentary. Relative laggards over the last week were WFC (+4%), JPM (+5%), and MS (+5%).
This week our WR Diversified Banks & Brokers Index was up +2.7%, slightly outpacing the broader market (+2.5%) and tracking ahead of the S&P Fins. (+1%). The move higher was led by the Regional Brokers (+7%), with the M&A Independents (+1%) and Universal Brokers (+1%) lagging the rest of the group.
This week our WR Diversified Banks & Brokers Index was up +4%, outpacing S&P Fins. (+3%) and the broader market (+2%). The move higher was led by the Universal brokers (+6%) and M&A Independents (+6%), with the Trusts (+2%) and Regional Brokers (+2%) lagging the rest of the group. The big stock winner this week was EVR (+8%) which benefited from winning the Bristol / Celgene advisory mandate (~$20mm fee, per Dealogic).
Two more rate hikes in 2019. Fed balance sheet unwind poised to continue. Investors banging their heads against a wall that’s now in the House budget plan. It was a tough week for the market (-7%), though our Wolfe Diversified Banks & Brokers Index did fare a bit better (-4% WoW). LPLA (-2%) and WFC (-3%) were relative outperformers, and BK (-8%), SF (-8%), C (-9%), and EVR (-10%) all lagged. With fewer than five trading sessions before we close out the year it is increasingly likely the market finishes in the red (-10% YTD). The performance has been even worse for our coverage which is down -23% YTD, with LPLA the clear standout (+2%), and GS (-37%) and STT (-38%) the biggest laggards.
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