Company Reports

Evercore reported a relatively slow start to 2024, especially compared with other investment banks that had a strong first quarter, but we feel the medium-term outlook for earnings remains positive. The company reported net income of $86 million, or $2.09 per diluted share, on $581 million of net revenue. Net revenue increased 2% from a year ago. While the company's core advisory revenue was down 7% to $430 million, it was offset by a 143% increase in underwriting revenue to $56 million, as well as other revenue. Along with first-quarter earnings, the company announced an increase in its quarterly dividend 5% to $0.80 per share. We don't anticipate making a material change to our $177 per share fair value estimate for narrow-moat Evercore and assess the shares as being fairly valued.

The end of Evercore’s revenue and earnings downturn should be near. Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up, and Evercore subsequently grew revenue over 45% in 2021. Revenue in 2021 was abnormally high and was destined to normalize lower, in our opinion. Net revenue in 2023 was 26% lower than the 2021 peak, as interest rates and economic uncertainty increased. With global interest rates likely having peaked and increasing market expectations of a relatively mild economic slowdown, in contrast to a recession, in the US, Evercore's revenue and earnings should be on an uptrend starting in 2024. However, we’re currently forecasting that it will take multiple years for the company to exceed its 2021 revenue level.

Evercore reported fairly good results in its seasonally strong fourth quarter, although full-year results still showed signs of the year's slowdown in capital markets activity. The firm reported full-year net income to common shareholders of $255 million, or $6.37 per diluted share, on $2.4 billion of net revenue. Net revenue in 2023 was 12% lower year over year 2022 and 26% lower than the abnormally high top-line result from 2021. Full-year net income was 46% lower than 2022 levels and 65% lower than Evercore reported in 2021, as the lower revenue this past year, along with the company's recent hiring of senior managing directors, increased the compensation ratio for 2023 to 68% from an average of 59% annually the previous five years.

As expected, Evercore had another relatively weak quarter, but we continue to believe that earnings will stage a strong recovery in the next 1 to 2 years. The company reported earnings to common shareholders of $52 million, or $1.30 per diluted share, on $570 million of net revenue. Net revenue was down 1% from the previous year, 14% higher from the previous quarter but about 20% lower than the trailing three-year average. Economic uncertainty and higher interest rates have weighed on revenue. While the management teams of investment banks seemed more optimistic the previous quarter before the “higher for longer” interest rate outlook emerged and the recent Israel-Hamas war, U.S. economic indicators are still fairly healthy, which should support a recovery in mergers and acquisitions advisory revenue in the next year or so. We don’t anticipate making a material change to our $171 fair value estimate for Evercore and assess shares are modestly undervalued.

We are increasing our fair value estimate for narrow-moat Evercore to $171 per share from $166. This corresponds to a forward price/adjusted earnings multiple of around 11.5 times and a forward enterprise value/EBITDA multiple of about 11 times. Of the net $5 increase in our fair value estimate, most of it was from earnings since our previous valuation update with additional adjustments for working capital, managing director productivity, and managing director headcount.

The end of Evercore’s revenue and earnings downturn should be near. Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up, and Evercore subsequently grew revenue over 45% in 2021. Revenue in 2021 was abnormally high and was destined to normalize lower, in our opinion. The 16% decline in revenue in 2022 was partly due to normalization and partly due to the Federal Reserv and other central banks enacting more restrictive monetary policies to rein in inflation and the related prospect of a recession.

Evercore is positioning itself to benefit when the mergers and acquisitions cycle recovers, but near-term earnings will be weighed down by the related investment in headcount. The company reported net income to common shareholders of $37 million, or $0.95 per diluted share, on $499 million of net revenue. Net revenue decreased 21% from the previous year and 13% from the previous quarter and was at the lowest level since the third quarter of 2020. While people are becoming more optimistic on the economy, mergers are transformational events for companies, and merger announcements and merger closings could take a couple more quarters to ramp up. We don’t anticipate making a material change to our $166 fair value estimate for narrow-moat-rated Evercore and assess shares are modestly undervalued.

As expected, Evercore’s first-quarter earnings were relatively weak, and the environment remains challenging, so we don’t forecast a strong recovery in the near term. The company reported net income to common shareholders of $83 million, or $2.06 per diluted share, on $572 million of net revenue. Net revenue declined 21%, and operating income declined 49% from the previous year, as the company was still working on its strong deal backlog at the beginning of 2022 and about the full force of macroeconomic uncertainty is currently affecting results. The $572 million of net revenue in the quarter is the lowest since 2020 when the world was uncertain of the effects of COVID-19. While we believe earnings will remain subdued for a year, we believe shares are undervalued looking at longer-term earnings, and we don’t expect to make a material change to our $166 fair value estimate for narrow-moat-rated Evercore.

Most of the issues that affected Silicon Valley Bank don’t apply to the wealth management firms and investment banks that we cover, so we don’t plan to make material changes to our fair value estimates or Morningstar Economic Moat Ratings for Morgan Stanley, Goldman Sachs, Ameriprise Financial, Raymond James Financial, LPL Financial, Stifel Financial, Evercore Group, or Lazard.

Evercore’s revenue and earnings could experience a relatively tough year or two compared with the outstanding results that it booked in 2021. Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up, and Evercore subsequently grew revenue over 45% in 2021. Revenue in 2021 was abnormally high and was destined to normalize lower, in our opinion. The 16% decline in revenue in 2022 was partly due to normalization and partly due to the U.S. Federal Reserve and other central banks enacting more restrictive monetary policies to rein in inflation and the related prospect of a recession. That said, based on our estimate of the company's intrinsic value that looks past the near-term rough patch in earnings, we believe narrow-moat Evercore is moderately undervalued.

Evercore’s revenue and earnings could experience a relatively tough year or two compared with the outstanding results that it booked in 2021. Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up, and Evercore subsequently grew revenue over 45% in 2021. Revenue in 2021 was abnormally high and was destined to normalize lower, in our opinion. The 16% decline in revenue in 2022 was partly due to normalization and partly due to the U.S. Federal Reserve and other central banks enacting more restrictive monetary policies to rein in inflation and the related prospect of a recession.

Evercore had a fairly good fourth quarter, but revenue and earnings will likely go back to being subdued for the next several quarters. The company reported net income to common shareholders of $140 million, or $3.44 per diluted share, on $831 million of net revenue for the fourth quarter. Net revenue grew 44% from the previous quarter, as the fourth quarter has positive seasonality, but it was down 25% from the previous year’s record quarter. For the full year, net revenue declined 16% to $2.76 billion and net income declined 36% to $477 million. We don’t anticipate making a material change to our $158 fair value estimate for narrow-moat Evercore and assess shares are moderately undervalued.

Evercore’s net revenue and earnings are experiencing steep declines compared with a strong 2021, but much of the company’s cyclicality is already incorporated in its stock price. The company reported net income to common shareholders of $82 million, or $2.03 per diluted share, on $577 million of net revenue. Year-to-date net revenue is 11% lower than the previous year, while net revenue in the quarter was 30% lower than a year ago. It can take several quarters from when a merger deal is announced to when it closes and when the company books the bulk of deal-related revenue, so this quarter’s 30% net revenue decline is more representative of the effect of the currently uncertain macroeconomic environment and lower appetite for mergers. We don’t anticipate making a material change to our $158 fair value estimate for narrow-moat-rated Evercore and assess shares are undervalued.

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 we believe it will normalize lower over the next several years.

Evercore’s first half of 2022 results are relatively strong, but the company will likely experience revenue headwinds in the following quarters. The company reported net income to common shareholders of $95.6 million, or $2.33 per diluted share, on $631 million of net revenue. Net revenue in the second quarter was 8% lower from a year ago, and first half of 2022 revenue was flat with the first half of 2021. We expect to lower our fair value estimate for narrow-moat Evercore but also believe that our assessment will continue to be that shares are undervalued.

Evercore reported fairly strong first-quarter results, but the uncertain macroeconomic environment and normalization from cyclical revenue highs in 2021 could weigh on its revenue and earnings for years. That said, we believe there’s value based on where the shares are currently trading compared with our revised fair value estimate of $168. We project that normalized earnings per share for narrow-moat Evercore should be $12-$14 and that normalized revenue growth for the company after rebasing from the cyclically high 2021 level will be in the midsingle digits, so the company appears undervalued at less than $110 per share currently.

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 we believe it will normalize lower over the next several years.

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 we believe it will normalize lower over the next several years.

We are increasing our fair value estimate for narrow-moat Evercore to $172 per share from $158. Our fair value estimate corresponds to a forward price/adjusted earnings multiple of around 14 times and a forward enterprise value/EBITDA multiple of around 11 times. Of the net $14 per share increase in our fair value estimate, $12 was from changes in our modeling of the company's balance sheet, $5 was from increasing our long-run forecast for the company's operating margin by 0.5-percentage points, and $1 was from earnings accrued since our previous valuation update. These positive adjustments were offset by the incorporation of $4 in deductions from our valuation tied to near-term earnings headwinds from the recent worsening of the global economic outlook. We assess the shares as being undervalued currently.

Given recent events, we decided to look at the exposure of some U.S.-listed investment banks to Europe. Potential causes of near-term turbulence include recession risk, higher commodity prices and inflation, central bank reactions, economic uncertainty weighing on investment banking deals, lower asset prices decreasing asset management revenue, and a greater dispersion in trading revenue. While we’ll be making some adjustments, we don’t expect to make material changes in our fair value estimates or economic moat ratings, as our long-term outlook remains largely unchanged. Lazard, Evercore, and Goldman Sachs are currently trading at material discounts to our fair value estimates.