Investments In Technology, Industrials, And Energy Will Exceed Expectations And Fuel Future Success

Key Takeaways

• Strategic investments in key sectors and expanded capabilities in private funds advisory indicate potential for future revenue and earnings growth.
  
• A robust balance sheet supports growth initiatives, boosting future earnings potential through strategic investments or capital returns.
  
• Increasing non-compensation expenses, talent competition, and regulatory delays could negatively impact Moelis' net margins and revenue growth amidst strategic expansion risks.

Catalysts

Operates as an investment banking advisory firm in North and South America, Europe, the Middle East, Asia, and Australia.

• Moelis made significant investments in key sectors such as technology, industrials, and energy, which have begun to exceed expectations and should drive future revenue growth as these sectors remain active.
  
• The hiring of a market-leading banker as Global Head of Private Funds Advisory highlights Moelis's commitment to expanding its capabilities in providing private capital solutions, likely enhancing future earnings through increased advisory revenues.
  
• The anticipated increased M&A activity due to a pro-growth government strategy and an uptick in sponsor activity could drive Moelis's revenue growth, enhancing earnings prospects.
  
• Expanded restructuring capabilities amidst elevated rates and enhancing creditor coverage suggest growth potential in this segment, impacting revenue positively.
  
• A strong balance sheet with substantial cash and no debt supports growth initiatives and capital returns, possibly enhancing future earnings per share through strategic investments or shareholder returns.

Moelis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Moelis's revenue will grow by 15.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 23.2% in 3 years time.
• Analysts expect earnings to reach $423.0 million (and earnings per share of $4.64) by about March 2028, up from $136.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 30.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Moelis Future Earnings Per Share Growth

Risks

• The increase in non-compensation expenses, particularly due to investments in technology and occupancy, could impact net margins negatively as these costs are anticipated to trend higher into 2025.
  
• Regulatory delays in deal completion could pose a risk to revenue recognition, as transactions may not finalize as swiftly as anticipated, impacting revenue and earnings timelines.
  
• The expansion into private funds advisory, while seen as a strategic investment, involves inherent risks and costs that might dilute short-term profit margins due to recruitment and setup expenses.
  
• The competitive market for hiring and retaining top talent could pressure compensation ratios, affecting operating leverage and profitability, thus impacting net margins.
  
• As restructuring activity heavily influences part of the revenue, any changes in economic conditions that decrease the need for restructuring services could lead to lower revenue growth from this segment.

Valuation

• The analysts have a consensus price target of $74.714 for Moelis 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 $92.0, and the most bearish reporting a price target of just $63.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $423.0 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $59.41, the analyst price target of $74.71 is 20.5% 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.