Increasing Our Valuation for Evercore to $177; 2024 Likely Start of Investment Banking Recovery

Director

Michael Wong

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 historically had industry-leading productivity and growth. During 2017-23, advisory revenue per senior managing director was around $19 million annually compared with less than $10 million at multiple peers, according to our calculations. The high productivity is largely attributable to the company's geographic mix being weighted more to the United States, which had a healthier merger and acquisition recovery than the rest of the world in those years. 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 had 136 senior managing directors at the end of 2023 in its advisory business compared with about 60 in 2012.

Typically over 80% of Evercore’s net revenue is investment banking advisory (primarily mergers and acquisitions advisory), and the remainder is underwriting, trading commissions, and investment management. While the institutional equities business largely underperformed expectations for years, some strong underwriting quarters and senior managing director headcount growth give an indication that the expected synergies with the company’s 2014 acquisition of ISI Group are being realized.

Business Strategy & Outlook

Investment banking moats are primarily built on intangibles. A strong reputation makes it more likely that an investment bank will be selected as a bookrunner, capturing more of the profits from an underwriting deal, and gives the firm an early opportunity to hire top revenue-generating talent.

We assign Evercore a Narrow Morningstar Economic Moat Rating on the basis of its high-margin core advisory business, which benefits from intangibles, such as its independence, client relationships, and geographic reach. The firm's primary source of revenue is financial advisory from merger, acquisition, and restructuring advisory activities. Financial advisory has high margins and high returns on capital when not coupled with financing. Additionally, there has been a trend for corporations to seek out advice from advisory firms that are free of the potential conflicts of interest inherent in larger investment banks. This is a differentiating factor and potential basis of a defensible niche against bulge-bracket investment banks and universal banks. Evercore's international presence allows the company to land cross-border financial advisory assignments that more domestically orientated financial advisory firms can't compete for. The company has industry-leading productivity per senior managing director with average investment banking revenue per senior managing director around $19 million annually from 2017 through 2023 according to our calculations.

Evercore’s investment management and institutional equities businesses, which compose around 20% of net revenue, don’t materially factor into our economic moat rating for the firm due to their relatively small contribution to the firm and absolute size compared with peers. Investment management moats are mostly derived from switching costs and intangible assets with many wealth management firms having only single-percentage point turnover in clients annually. At the end of 202, the company’s investment management businesses had $12.3 billion in client assets, compared with wirehouse wealth management firms with trillions in client assets and large, regional wealth management firms that have hundreds of billions. 

We view institutional equities as a more competitive business than advisory or investment management, but the company could build a competitive advantage in this area based on intellectual capital. While Evercore has strong securities research capabilities after its acquisition of ISI Group in 2014, even the largest investment banks are having a difficult time earning appropriate returns in their trading businesses, and many European investment banks have consequently downsized their trading operations. Trading revenue hasn’t materially grown since 2014. That said, Evercore has been gaining traction in underwriting and booked a record $247 million, 7.5% of net revenue, in 2021. Additional benefits of the ISI acquisition may also be showing up in the high growth in senior managing director headcount, as certain bankers may have been reluctant to join an investment bank without a material capital-raising platform.

Narrow

Economic Moat

Evercore

Evercore, Inc. operates as a investment banking advisory company. It operates through the Investment Banking and Investment Management business segments. The Investment Banking segment includes the global advisory business of the company through which the firm delivers strategic corporate advisory, capital markets advisory, and institutional equities services. The Investment Management segment comprises wealth management and trust services through Evercore Wealth Management L.L.C. and investment management in Mexico through Evercore Casa de Bolsa, S.A. de C.V., as well as private equity through investments in entities that manage private equity funds. The company was founded by Roger C. Altman in 1995 and is headquartered in New York, NY.

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Evercore reports successful 2022 performance, eyes growth opportunities

Evercore had a strong financial performance in 2022, with notable achievements across various business segments. The company's strategic investments and focus on key sectors have positioned it well for growth. Challenges in certain business areas were effectively managed, and opportunities for revenue growth and market recovery are being actively pursued.

Evercore reports solid Q1 results amidst market challenges and opportunities

Evercore's Q1 2023 performance reflected resilience in a challenging market environment, with a focus on talent, expense management, and strategic growth. While facing declines in certain financial metrics, the company remains committed to navigating market volatility and seizing opportunities for expansion and improvement.

Evercore reports Q2 decline, eyes restructuring market for growth

Evercore's Q2 2023 performance saw declines in revenues and profits, impacted by hiring pressure and economic factors, with a focus on disciplined expense management and shareholder returns.
The company faces challenges in advisory fees, compensation ratios, and rising expenses, but sees opportunities in restructuring and merger markets, sustained growth, and cost efficiency.
Analyst questions and cautious optimism about market recovery indicate areas of scrutiny and strategic planning for Evercore's future performance and financial stability.
Despite challenges, Evercore's strategic focus on talent, business diversity, and expense management positions it for potential growth and success in the medium to long term.

Evercore reports resilient Q3 performance amidst market challenges

Evercore's Q3 performance showed resilience amidst market challenges with a focus on cost management.
The company's strengths in hiring, strategic insights, and balance sheet management were evident.
Challenges included muted market activity, expense inflation, and competitive landscape dynamics.
Opportunities for growth exist through strategic transactions, leveraging hiring, and ESG focus.

Evercore reports Q4 revenue decline but eyes growth opportunities

Evercore's Q4 2023 earnings call highlighted a decline in revenues but strong investments for future growth. The firm faces challenges in deal timelines and compensation ratios but sees opportunities in market conditions and internal development. Overall, Evercore is optimistic about 2024 and continues to focus on diversification and talent.

Evercore reports strong Q1 performance, eyes global expansion and talent

Evercore's Q1 2024 performance reflects strong financial stability, growth in key sectors, and a strategic focus on shareholder value.
The company's notable transactions, record AUM, and talent recruitment efforts position it well for future expansion and success.
Challenges include slower activity in certain deal segments and the need to balance growth with cost management effectively.
Opportunities in global deal advisory services, sector-specific growth, strategic recruitment, and sustained market optimism pave the way for continued success.

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