Triago Acquisition And Tactical Expansion Set To Fuel Revenue And Reshape The Corporate Finance Landscape

Key Takeaways

• Acquisition of Triago and strategic hiring are set to expand Houlihan Lokey's market reach and operational efficiency across multiple segments.
  
• Robust M&A activities and heightened financial restructuring activity indicate strong revenue growth potential in both Corporate Finance and Capital Markets, as well as Financial Restructuring segments.
  
• Vulnerability to economic downturns, high interest rates, and geopolitical uncertainties risks affecting revenue, net margins, and the outcome of strategic expansions.

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.

• The acquisition of Triago and the subsequent enhancement of Houlihan Lokey's private funds capabilities present a significant growth opportunity by expanding services across primary, secondary, directs, and GP advisory markets, likely impacting revenue growth.
  
• Increased transaction size and fee per transaction, especially outside the U.S., indicate a strong potential for higher revenue generation in the Corporate Finance segment.
  
• The aggressive capital deployment by middle market capital providers suggests robust M&A activities, supporting future revenue growth in both Corporate Finance and Capital Markets businesses.
  
• Elevated financial restructuring activity, driven by persistently higher interest rates and political dislocations, implies sustained high revenue potential in the Financial Restructuring segment, with the possibility of transitioning some restructuring activities into profitable refinancing opportunities as market conditions improve.
  
• Strategic hiring and promotion of new managing directors aim to bolster the firm’s expertise and capabilities, potentially enhancing revenue generation across all business lines due to improved operational efficiency and expanded client service offerings.

Assumptions

• Analysts are assuming Houlihan Lokey's revenue will grow by 12.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.3% today to 17.3% in 3 years time.
• Analysts expect earnings to reach $499.0 million (and earnings per share of $6.69) by about September 2027, up from $307.9 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 25.6x on those 2027 earnings, down from 35.6x today. This future PE is greater than the current PE for the US Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Risks

• The reliance on market conditions and M&A activity for revenue growth indicates vulnerability to economic downturns, which could affect revenue and net margins.
  
• Higher interest rates and political dislocation, particularly in Europe, are risks that could impact financial restructuring revenues, potentially leading to a decrease in this income stream.
  
• The aggressive expansion through acquisitions, such as the acquisition of Triago, and the addition of new managing directors, indicates a strategic risk if these investments do not yield the anticipated returns, affecting earnings and net margins.
  
• Elevated compensation and non-compensation expenses, partially resulting from expansion efforts and strategic investments, could pressure net margins if revenue growth does not meet expectations.
  
• Exposure to various geopolitical and macroeconomic uncertainties, like the U.S. presidential election and international tax rate fluctuations, could negatively impact financial performance and investor sentiment, affecting earnings and the effective tax rate.

Valuation

• The analysts have a consensus price target of $150.43 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 $170.0, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.9 billion, earnings will come to $499.0 million, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 6.6%.
• Given the current share price of $157.66, the analyst's price target of $150.43 is 4.8% 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.