Investment In Talent And Private Credit Will Drive Future Expansion

Key Takeaways

• Hiring in strategic areas might pressure margins if revenue growth does not offset high compensation expenses.
  
• Delayed transaction completion and high interest rates may hinder short-term revenue growth and earnings projections.
  
• Moelis & Company's growth across products, strategic sector expansion, and private credit focus could sustain revenue growth and enhance long-term profitability.

Catalysts

Operates as an investment banking advisory firm.

• The prolonged restructuring cycle centered around liability management exercises, due to a large amount of noninvestment-grade debt maturing in the next few years, could lead to a slower growth in restructuring revenues if these exercises don't translate into more profitable deals quickly enough.
  
• The rise of private credit, allowing Moelis to compete with legacy banks on capital arrangements, may not immediately convert into significant revenue growth due to unforeseen competitive pressures and execution risks, which might impact earnings if not managed effectively.
  
• The continuous hiring and addition of talent in strategic areas without a proportional increase in revenue might pressure net margins if the anticipated revenue growth does not materialize, especially given the stated high compensation expenses.
  
• The longer time to complete transactions due to various market dynamics, including regulatory challenges and slow private equity fundraising, might delay revenue recognition, impacting short-term earnings growth.
  
• The potential slowdown in market activity due to factors like high interest rates and uncertainty in capital reallocation into private equity could hinder anticipated revenue growth, impacting overall earnings projections.

Moelis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Moelis's revenue will grow by 23.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 21.8% in 3 years time.
• Analysts expect earnings to reach $402.0 million (and earnings per share of $4.57) by about December 2027, up from $41.0 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 18.7x on those 2027 earnings, down from 128.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 4.65% 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.

Moelis Future Earnings Per Share Growth

Risks

• Moelis & Company has seen an 18% year-over-year increase in revenues for the first nine months of the year, driven by growth across all major product areas, which could positively impact revenue.
  
• The M&A market is showing gradual improvement, and equity market valuations are at or near all-time highs, suggesting a positive outlook for future deal activity, which could boost revenue and earnings.
  
• A rise in private credit has created additional opportunities for Moelis to arrange capital for clients, allowing them to compete with legacy banks and potentially increasing profitability.
  
• Moelis’ strategic investments in capital structure advisory and private credit markets could lead to prolonged revenue growth, particularly if the restructuring cycle continues due to maturing non-investment-grade debt.
  
• The company's proactive recruitment and expansion in key strategic sectors, such as biotech, enhance its service offerings and expertise, positioning it to drive long-term growth, which could improve net margins and earnings.

Valuation

• The analysts have a consensus price target of $70.71 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 $57.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $402.0 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of $74.29, the analyst's price target of $70.71 is 5.1% lower. 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.