Waller Helms Acquisition And Private Capital Expansion To Drive Future Opportunities

Key Takeaways

• Expansion across geographies and industries is driving revenue growth, bolstered by strategic and private equity clients.
  
• Strength in restructuring and private capital financing suggests stable and growing earnings amid high interest rates.
  
• Increased competition and macroeconomic uncertainties could pressure Houlihan Lokey's revenue growth and hinder market share expansion amid declining transaction fees and elevated interest rates.

Catalysts

An investment banking company, provides merger and acquisition (M&A), capital market, financial restructuring, and financial and valuation advisory services in the United States and internationally.

• Houlihan Lokey's Corporate Finance segment is experiencing widespread growth across geographies and industries, driven by both strategic and private equity clients, which is expected to enhance revenue growth.
  
• The firm's acquisition of Waller Helms and new managing director hires are anticipated to strengthen operational capabilities and boost revenue and earnings in future quarters.
  
• Continued high levels of interest rates and recent success in the restructuring segment suggest prolonged strength in this area, expected to maintain or increase earnings stability.
  
• The positive outlook on M&A market and increase in private equity activity signal potential for accelerated revenue growth and improved net margins, as transaction volume and close rates rise.
  
• Expansion in the private capital financing sector positions Houlihan Lokey to capitalize on opportunities in a growing market, supporting long-term revenue and earnings growth.

Houlihan Lokey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Houlihan Lokey's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 19.5% in 3 years time.
• Analysts expect earnings to reach $590.5 million (and earnings per share of $7.73) by about January 2028, up from $334.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.2x on those 2028 earnings, down from 38.6x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Houlihan Lokey Future Earnings Per Share Growth

Risks

• The decrease in average transaction fees in Corporate Finance and Financial Restructuring due to transaction mix could negatively impact revenue and profit margins.
  
• Increased competition in the capital markets, including the entry of large firms like Goldman Sachs into similar market spaces, could pressure revenue growth and hinder Houlihan Lokey's market share expansion.
  
• Uncertainty in macroeconomic conditions and potential changes in tariffs or international trade policies could affect the global M&A landscape, impacting Houlihan Lokey's transaction volumes and revenues in different regions.
  
• Elevated interest rates and the expectation of maintaining higher restructuring activity suggest vulnerability to economic shifts, which could disrupt revenue stability if the anticipated environment changes.
  
• Despite growth optimism, stagnant or declining transaction velocity compared to pre-pandemic levels flags potential risks in achieving projected revenue growth rates, impacting overall financial performance.

Valuation

• The analysts have a consensus price target of $186.14 for Houlihan Lokey based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $229.0, and the most bearish reporting a price target of just $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $590.5 million, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $184.07, the analyst's price target of $186.14 is 1.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.