Cross-Border M&A And Data Analytics Will Expand Advisory Horizons

Key Takeaways

• Accelerating deal sizes, expanding global reach, and technology-driven solutions position Houlihan Lokey for sustained revenue and net margin growth beyond analyst expectations.
  
• Enhanced sector breadth, leadership in restructuring, and investment in talent and platforms support long-term operating leverage and outperforming industry peers in earnings growth.
  
• Increased automation, regulatory scrutiny, market cyclicality, rising competition, and talent retention pressures threaten revenue growth, fee levels, and sustainable margins for Houlihan Lokey.

Catalysts

An investment banking company, provides merger and acquisition (M&A), capital market, financial restructurings and liability management, and financial and valuation advisory services worldwide.

• While analyst consensus is optimistic about Corporate Finance growth, they likely underappreciate the powerful combination of Houlihan Lokey's surging average deal sizes, broadening fee pools, accelerating international momentum, and standout brand trajectory, all of which point to the potential for outsized, durable revenue expansion and significant net margin strengthening over the next several years.
  
• Analysts broadly acknowledge the earnings lift from acquisitions and new managing director hires, but they may be materially underestimating how the expanded sector, geographic and product reach-combined with a boost in senior and internally developed talent-can deliver step-change improvements in long-term operating leverage and sustained double-digit earnings growth.
  
• The company is exceptionally well positioned to capture market share from the rising complexity and scale of cross-border M&A, as global regulatory, geopolitical and industry shifts drive demand for sophisticated, independent advisors, likely resulting in both premium fee growth and a higher quality, recurring revenue base.
  
• Rapid advances in Houlihan Lokey's data analytics, technology platforms and investment in "Capital Solutions" are enabling the firm to deliver more scalable, higher-value client solutions, unlocking new sources of noncyclical revenue and further improving net margins through operating efficiencies and platform diversification.
  
• The continuing global surge in private capital and alternative asset flows, combined with Houlihan Lokey's unique leadership in restructuring and valuation, provides a structurally expanding addressable market, setting the foundation for multi-year, compounding growth in revenue and robust earnings outperformance relative to industry peers.

Houlihan Lokey Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Houlihan Lokey compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Houlihan Lokey's revenue will grow by 15.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 16.7% today to 16.9% in 3 years time.
• The bullish analysts expect earnings to reach $611.6 million (and earnings per share of $8.88) by about July 2028, up from $399.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, down from 34.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Houlihan Lokey Future Earnings Per Share Growth

Risks

• The growing automation and adoption of artificial intelligence in financial services threatens to commoditize core advisory functions, which could reduce Houlihan Lokey's ability to maintain premium fee levels and put pressure on both revenue growth and net margins over time.
  
• Heightened global regulatory scrutiny and increasing compliance costs across financial transactions could make deals more complex and lengthen transaction timelines, potentially dampening transaction volumes and impacting the company's overall earnings and fee revenue.
  
• The company remains heavily reliant on cyclical markets, particularly its restructuring advisory business; if global economies return to or sustain prolonged stability and low default rates, Houlihan Lokey may see a significant decline in high-margin restructuring revenues, increasing earnings volatility and putting future net margins at risk.
  
• Persistent fee compression and growing competition from fintech entrants, cross-border firms, and full-service banks offering bundled solutions may erode Houlihan Lokey's market share and reduce pricing power, directly impacting revenue growth and profit margins.
  
• Challenges in attracting and retaining top talent amid industry-wide compensation pressure, especially from larger and more tech-enabled platforms, could result in higher compensation expenses, squeezing net margins and limiting the company's ability to drive sustainable long-term earnings growth.

Valuation

• The assumed bullish price target for Houlihan Lokey is $232.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Houlihan Lokey's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $232.0, and the most bearish reporting a price target of just $162.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $611.6 million, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $195.27, the bullish analyst price target of $232.0 is 15.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.