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Evercore (NYSE:EVR) is one of the more respected shops out there. They did a decent showing for 2022 despite pressures, and managed to keep the ship afloat while M&A volumes plummeted from the relatively high levels in 2021. The problem is credit tightening will mean a delay in already depressed sponsor activity, and public credit may get worse too that will hit corporate M&A and especially in some of EVR’s better markets like energy and industrials. Advisory was their strong leg thanks to decent corporate M&A but also other advisory business like takeover defense, where ECM and sponsor facing placement businesses have been decimated, so a hit to advisory is going to be an incremental problem. There’s a long way to fall from what was still a pretty decent 2022 for the M&A markets, despite the ugly look from comp effects, a recession will do just that to Evercore – unless restructuring and other countercyclical businesses do the trick.
FY 2022 Earnings
Volumes for M&A were pretty good, and this is about 2/3rds of the Evercore business. There were 9% declines in announced transactions for EVR, and the situation broadly in M&A markets is around 36% decline. The relative strength shows in the revenue which is only down 26% YoY for the Q4, which isn’t too bad relative to other companies and is mainly being brought down by issues in ECM (activity levels down 80%) and LP and GP facing businesses in placement. EVR has quite a lot of larger-cap business, and the declines in dollar value of deals as megadeals ended with 2021, is the other main drag on the Q4 and the annual results which are down 16% in revenues.
But there is a decent amount of resilience in corporate M&A, and EVR is reasonably well exposed to the mid-market. Moreover, advisory activity outside of M&A, including takeover defense and other businesses, have been of help. Restructuring is beginning to pick up as financial issues at companies are becoming too difficult to handle for CFOs, and firms like Evercore are now needed. In general Europe has been a point of resilience, which is about 30% of the company’s revenue
Income Statement (10-K 2022)
Revenues are still substantially ahead of 2020 levels, and the 2022 FY is still the second best in the company’s history. A lot can go wrong considering the situation in credit markets.
Outlook
There is a lot implicit in the earnings call that leads us to believe that management was not ready for what happened in banking over the last week.
We’ve seen that the investment grade public market has opened up on the credit side. And I think that — so, certainly, there is a beginning to see some liquidity in the market for strategic transactions. But I think that a lot of the boards and management teams are still standing back and waiting because there are so many exogenous things that could happen, and I think they’re watching to see what happens in the Fed today and the messaging from the Fed.
John Weinberg, CEO of EVR
Firstly, while high level corporate credit might be opening up a little, if the boards are really the bottleneck in terms of deal activity, they are unlikely to become more excited as crimping on households by banks, which is likely where we’ll see some of the initial meaningful credit tightening go on as loan volumes come under real pressure in 2023, causes the economy to become much more deflationary due to a real destruction in household wealth. Then there’s the matter of whether top level corporate credit will really be that available after all.
There’s also the matter of LevFin, which matters a lot for the higher ticket sponsor activity. LevFin is still seriously restricted from the initial round of rate hikes. It will continue to remain just as restricted as default rates actually start to rise. So far, the real economic hits to employment and corporate profits haven’t really been seen yet. They are coming, and LevFin will dislike that just as much as they’ve disliked the volatility in the high-yield secondary markets caused by the repricing from higher prevailing rates. This will affect both the placement businesses but also the direct exposure to advising on the PE deal flow.
ECM will not perform well is equity markets continue to keep IPO activity quiet, and we see things just getting worse for the IPO market as some of the biggest IPO targets in tech and healthcare are still looking at pretty depressed markets that are likely to continue to turn down as lower sales velocity turns into a lack of new engagements, which is something that tech hasn’t yet seen.
Finally, some of the more active areas have been industrials and energy. While energy still benefits structurally from the dislocation in energy markets, oil prices and other energy commodities are down a lot on demand speculation. It started with China, but now other major consumers will be a concern too, including the US. Furthermore, we haven’t seen a real depression yet in industrial activity in any economic indicators in any geography. With CAPEXing and industrial investments being one of the more levered metrics to an economic recession, pressure on industrial companies is likely to develop.
Restructuring is highly regarded at EVR, but the headcounts aren’t so high on the dedicated teams. There are other types of advisory that should be more countercyclical, including private credit which may grow now that regional banking is likely to pull-back lending in markets where private credit could really step in as well as takeover defense, but at least 70% of the revenue is going to be very exposed to further credit tightening (all of M&A and all of underwriting, AM and placement). While a <9x PE on TTM earnings reflects a degree of caution, the direction of EVR should still be pretty bad. It trades at the same levels as Lazard (LAZ) on TTM income. Lazard is the better pick, since they have much less cyclicality due to the large AM portion in the LAZ mix. While both will decline, M&A is more cyclical and both have restructuring franchises.