Evercore Earnings: Investments in Senior Managing Director Headcount To Weigh on Earnings

Evercore EVR 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.

Evercore’s management stated that 11 advisory senior managing directors and one equities senior managing director have already joined or have agreed to join the company this year. These hires will pressure the compensation ratio and operating margins until there’s a recovery in merger activity. Already in the second quarter, the compensation ratio was 68% compared with a five-year average closer to 59%. The company’s noncompensation expenses are also up, partly due to inflation. Overall, the near-term earnings outlook continues to be challenging, but the company’s higher senior managing director headcount, currently over 140 including the pending hires, positions the company well for an eventual strong recovery.