Reducing the Fair Value for Evercore to $158; shares undervalued though near term will be choppy

Business Strategy & Outlook

Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up. Merger volume has been exceptionally strong, and it will normalize lower over the next several years. Evercore frequently has industry-leading productivity and growth. During 2017-21, advisory revenue per senior managing director was over $18 million annually compared with less than $10 million at multiple peers, according to the calculations. The high productivity is largely attributable to the company’s geographic mix being weighted more to the United States, which has had a healthier M&A recovery than the rest of the globe. A disciplined hiring and promotion philosophy also plays a key role. For much of the past decade, Evercore grew faster than peers, but it may be maturing, as it now had around 114 senior managing directors at the end of 2021 compared with about 60 in 2011. The investment management and institutional equities businesses that Ralph Schlosstein began building in 2010 usually accounts for around 20% of net revenue. The ISI Group acquisition in 2014 materially diversified Evercore’s business and was an accelerant to the equities business attaining a profitable scale. Evercore paid a full price for ISI, and much of the deal’s success hinges on whether Evercore can translate ISI’s research strength into equity underwriting deals and an underwriting capability into attracting incremental senior managing directors. While the institutional equities business largely underperformed expectations for years, some strong underwriting quarters and recent senior managing director headcount growth give an indication that the expected synergies are being realized. The company has retreated from institutional asset management and derives the bulk of its investment management revenue from wealth management to high-net-worth individuals.

Financial Strengths

Overall, Evercore appears to be in fine financial health. At the end of 2021, the company had notes payable of about $400 million. Most of the note’s payable don’t mature until 2026 or later. The company also generates significant amounts of free cash flow, as advisory, investment management, and flow-based equities trading are not capital-intensive businesses. Evercore has the ability to continue with its general policy of returning approximately all of its earnings to shareholders via dividends and share buybacks.

Bulls Say

Evercore has historically been able to increase advisory revenue faster than peers, and its revenue productivity per senior managing director often surprises to the upside.
The company has significant amounts of cash and investment securities on its balance sheet.
Expansion of Evercore’s investment management and institutional equities businesses will provide a modest base of revenue even during a downturn in M&A activity. Additional offices outside the U.S. will help mitigate the company’s current reliance on the U.S. market.

Company Description

Evercore is an independent investment bank that derives the majority of its revenue from financial advisory, including merger, acquisition, and restructuring advisory. It also has institutional equities and investment management businesses that account for around 20% of net revenue. The company was founded in 1996 and went public in 2006. Evercore had approximately 1,950 employees at the end of 2021, and about 75% of its revenue is derived from the United States.

(Source: Morningstar)

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