Image shown: The share-price performance of Evercore Partners since July 2017.
Evercore’s financial performance in recent years has been impressive as its net revenues have grown at an 18% CAGR since 2011, adjusted earnings per share have advanced at a 22% CAGR, and operating margins have expanded by more than 6 percentage points. The company is working to sustain operating margins of 25%+ in solid M&A markets, which it anticipates will continue in the near term. We currently value shares at ~$130 each. Evercore currently registers an impressive Dividend Cushion ratio of 4.9. Shares yield ~1.8%.
By Kris Rosemann
Evercore Partners (EVR) is a holding company with its only material assets represented by its ownership of partnership units in Evercore LP, which makes distributions to its partners. Evercore operates through two business segments: ‘Investment Banking’ (96% of 2017 revenue) and ‘Investment Management’ (4% of 2017 revenue). 27% of revenue in 2017 came from international operations. As an independent investment bank advisory, a significant portion of its revenue is derived from fees earned on providing advice on mergers, acquisitions, divestitures, leverage buyouts, restructuring, activism, defense, and other corporate finance matters. It also generates revenue via equity research commissions and its asset management business.
Evercore’s key clients include multinational corporations, financial sponsors, institutional investors, and sovereign wealth funds in its ‘Investment Banking’ business and family offices and wealthy individuals in its ‘Investment Management’ business. Its main competitors are large universal banks, independent advisors, and boutiques. Its independent nature means that it does not engage in commercial financing or proprietary trading in client securities, eliminating certain conflicts of interest, which it believes gives it an advantage in client relationships and retention.
As of the first quarter of 2018, Evercore held ~7.2% of the advisory market among all publicly-reporting firms, up from just 2.9% in 2011, and it continues to pursue expansion of its capabilities in geographic regions such as Europe, the Middle East, and Asia. Management tabs itself as the number 1 defense advisory in 2017, and it supported clients in the largest contested tech situation ever in 2017 (Broadcomm/Qualcomm), in addition to the largest healthcare, retail, REIT, transportation, and telecom deals in 2017.
Revenue in Evercore’s advisory business is typically correlated to the volume of M&A activity and/or restructuring activity, the latter of which is often counter-cyclical to M&A activity. Changes in market share or client ability to close large transactions can cause lumpiness in revenue trends that may deviate from overall M&A or restructuring trends. Its equities business revenue is tied to market volumes, which can face pressure in times of low market volatility or unfavorable market and economic conditions. Regulatory changes and the changing trends in research payments from institutional investors can also impact its equities business.
As a result of these ties, key risks include difficult market conditions, transaction volume and/or value reduction, changes in access to capital markets, and regulatory changes. Other risks include, but are not limited to its dependence on retaining and recruiting key talent, a large portion of fixed costs that may not lead to immediate revenue growth (resulting from key personnel acquisitions and the related compensation), potentially volatile quarterly earnings results, geopolitical disruptions in its markets served (Brexit a key example), potential litigation and related publicity/reputational damages, and a degree of customer concentration (top 5 Investment Banking clients accounted to 13% of 2017 revenue).
Evercore believes demand for strategic corporate and capital markets advisory services remains strong as economic conditions, globalization, technology, and regulation push clients towards strategic changes. Institutional equity investors are in a process of changing how consume research, presenting both opportunities and challenges for research providers such as Evercore, which believes new technologies coupled with its high quality independent research will drive its success moving forward. Though it is a rather small portion of its business, Evercore is confident in the ongoing demand for wealth management services to high net worth individuals and family offices.
Moving forward, Evercore expects M&A conditions to remain favorable. CEOs are expressing confidence in the economy, and financing conditions are expected to continue being relatively accommodative. Steady economic growth and evolving business models drive strategic actions. As it relates to restructuring activity, record levels leveraged loan volume is offsetting record low default rates, which is sustaining such activity in multiple sectors. Equity capital market activity has been relatively flat of late, but pockets of strength exist. The company’s wealth management business finished 2017 with $7.3 billion in assets under management, a firm record.
Evercore’s financial performance in recent years has been impressive as its net revenues have grown at an 18% CAGR since 2011, adjusted earnings per share have advanced at a 22% CAGR, and operating margins have expanded by more than 6 percentage points. The company is working to sustain operating margins of 25%+ in solid M&A markets, which it anticipates will continue in the near term. We currently value shares at ~$130 each.
Image Source: Evercore
As of the end of the first quarter of 2018, the firm held a net cash position of ~$336 million, and its total debt load of less than $169 million is far from a concern at this juncture given its average annual free cash flow generation of $413 million from 2015-2017. Annual cash dividends paid in 2017 came in at ~$57 million. Evercore currently registers an impressive Dividend Cushion ratio of 4.9 thanks to its free cash flow generation (low capital intensive business) and strong balance sheet. Shares currently yield ~1.8%.
Evercore aims to return all capital to shareholders after growth investments, and this has resulted in it returning more than 100% of net income to shareholders in recent years. The company has more than tripled its dividend since 2008, and its 25% hike in April 2018 (on the heels of an 18% increase in the fourth quarter of 2017) made 2018 its eleventh consecutive year of consecutive dividend increases. Directors and executive officers as a group hold ~10% of total combined voting power of Evercore, suggesting its shareholder friendly ways may be likely to continue.
Image Source: Evercore
Image Source: Evercore
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.