Money often costs too much. ― Ralph Waldo Emerson
Evercore Inc. (EVR) released fourth quarter earnings this week and showed many reasons to sell this stock, but hidden underneath are numerous reasons to buy shares. Net revenue decreased 14% and net income 16% from the same period last year. These lower numbers beat estimates however, so investors were not taken by surprise by the drop. The hidden value in Evercore is in the growth of their investment management division. Assets under management jumped 20% this quarter and revenue was up 22%. With the integration of ISI’s research, Evercore is able to better serve their investment management clients. Evercore should be able to continue growing their investment management division by at least 7% over the next 5 years, given the historical growth record. The revenue stream from asset management will help smooth their revenue from investment banking, which tends to be very lumpy.
The investment banking division saw a decline of 3% from 2018 to 2019 in net revenue, however their underwriting fees were a strong point jumping 25% for the same period. Over 25% of Evercore’s senior managing directors are in their position for less than 2 years. This is an area of potential growth as they settle into their territory and grow their business. The biggest headwind facing the investment banking division is the overall health of the economy. M&A activity tends to rise and fall the economy and Evercore’s business is heavily focused on the US, with 75% of revenue being generated domestically. “The first estimate of Q4 GDP will hit the streets on Thursday. The current GDPNow forecast calls for a 1.8% annual growth rate. That’s not an economic boom number, but it should satisfactorily confirm that the expansion is comfortably continuing,” according to the Lead-Lag Report. Evercore is starting to push their business internationally, which help expand the scope of their investment banking business.
Evercore is proactively examining expenses in 2020 before they grow too large and cause income sheet damage. EVR’s compensation ratio jumped 60.2% in the fourth quarter, from 55.8% last year. This led to a decline in their operating margin of 8.7%. It is a positive sign, that management recognized the creep in compensation and will decrease headcount by 6% in 2020. With the reduced headcount, revenue per employee will be back on track assuming revenue stays constant.
The stock popped 10% on the day earnings were released but has since fallen back to under $80/share. At the current price and estimated earnings of $1.74/share the stock looks inexpensive both historically and relative to its competitors. With a PE of 11.7, it is significantly less than its three-year average PE of 20.1. It is also inexpensive on a relative basis to it competitors.
EVR has a solid dividend yield of 2.8%, with a payout ratio of less than 17%. Evercore certainly has room to expand their dividend given their cash ($1.3 billion) on the balance sheet and competitors’ yield.
If you are looking for a solid company with little debt (0.48 debt to equity ratio), a competitive yield, and a management team that is focused on growing the business responsibly then Evercore is a good choice. Look to buy shares under $80 for upside potential of 25%.
*Like this article? Don’t forget to hit the Follow button above!
Sometimes, you might not realize your biggest portfolio risks until it’s too late.
That’s why it’s important to pay attention to the right market data, analysis, and insights on a daily basis. Being a passive investor puts you at unnecessary risk. When you stay informed on key signals and indicators, you’ll take control of your financial future.
My award-winning market research gives you everything you need to know each day, so you can be ready to act when it matters most.
Disclosure: I/we 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.
Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.