Houlihan Lokey (HLI) Delivers 32.6% Earnings Growth, Challenging Cautious Valuation Narratives

Houlihan Lokey (HLI) posted 32.6% earnings growth in the most recent year, a sharp acceleration from its 1% average annual pace over the past five years. Revenue is forecast to climb by 11.2% per year, outpacing the US market’s 10.3% growth outlook. Net profit margins have risen to 16.5% from last year’s 15.3%. Investors may see the combination of high quality earnings and improved profitability as encouraging, but a price-to-earnings ratio of 30.8x and share price of $179.08 put valuation well above both peers and the industry average. The market price also exceeds estimated fair value.

See our full analysis for Houlihan Lokey.

Next, we will weigh these results against the major market narratives to see which have been reinforced and which get called into question.

See what the community is saying about Houlihan Lokey

Profit Margins Climb to 16.5%

• Net profit margins rose to 16.5%, up from 15.3% last year, highlighting strong earnings quality and improved operational efficiency.
• According to the analysts' consensus view, these margin gains support expectations of sustained earnings growth. Ongoing sector diversification and global expansion are stabilizing advisory pipelines and growing fee income.
  • Further increases are anticipated, with analysts projecting margins to reach 18.5% in three years. This reflects optimism about Houlihan Lokey's ability to maintain pricing power as it adds new business lines and clients.
  • Consensus narrative also points to enhanced client engagement and digital investment as key drivers helping support and potentially lift future net margins.

See why the analysts' consensus sees margin expansion as the keystone for Houlihan Lokey's growth story. 📊 Read the full Houlihan Lokey Consensus Narrative.

Expense Ratios Remain High Despite Scale

• Compensation and non-compensation expenses stand at 61.5% and 15.6% of revenue, respectively, revealing a high cost structure that could challenge margins if top-line growth slows.
• Consensus narrative flags a tension between headcount growth and expense control. While bringing in senior talent supports new sector opportunities, it also raises fixed costs, leaving Houlihan Lokey more exposed if wage inflation continues or deal activity softens.
  • Despite these risks, resilient restructuring activity and solid client engagement have cushioned earnings from macroeconomic shocks. Analysts note that maintaining this balance will be crucial as economic conditions evolve.
  • Persistent high expenses are seen as a double-edged sword, providing necessary resources for expansion but potentially squeezing profitability if costs outpace revenue growth.

Premium Valuation vs DCF and Peers

• Houlihan Lokey trades at a price-to-earnings ratio of 30.8x, notably higher than the peer average of 17.1x and the industry average of 25.6x. The current share price of $179.08 sits well above the DCF fair value of $68.80.
• Consensus narrative notes that for the stock to justify this premium, Houlihan Lokey will need to deliver on robust earnings growth targets and margin expansion. Even then, with the current share price already outpacing both DCF valuation and peer multiples, the upside may be limited unless the business can consistently outperform analyst projections.
  • The small gap (5.3%) between the analyst target price of $214.57 and today's price suggests the market sees modest further appreciation, but not dramatic upside.
  • This places pressure on the company to exceed growth expectations, especially as industry and macro-economic headwinds persist.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for Houlihan Lokey on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

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A good starting point is our analysis highlighting 2 key rewards investors are optimistic about regarding Houlihan Lokey.

See What Else Is Out There

Despite impressive margin gains, Houlihan Lokey’s high valuation and elevated expense ratios could leave investors exposed if growth expectations fall short.

If you’re searching for stocks where the price tag better matches fundamentals, spotlight these 832 undervalued stocks based on cash flows and uncover companies trading well below their intrinsic value.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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