EUR 850.00 For Business Accounts Only

Morningstar | Evercore's First Half of 2019 Earnings Holding Up; Shares Fairly Valued

Narrow-moat Evercore's revenue and earnings are holding up fairly well, despite an increasingly cautious tone to the economic outlook. Net revenue increased 4% to $946 million during the first half of 2019, with most of the gain coming from the company's advisory business (where net revenue increased to $769 million). Even so, first-half earnings per diluted share decreased slightly to $3.40 from $3.62, due to operating margins contracting to 22% from 24% in the year-ago period and a higher tax rate. We don't anticipate making a material change to our $97 per share fair value estimate.

Evercore remains more leveraged to the health of the U.S. economy than its peers. For most of the firm's history, more than 70% of net revenue has been derived from North America. While some investors are concerned about the stability of the global economy (with uncertainty created by both the U.S. led tariffs and the timing and impact of a full Brexit), there is a growing consensus that the Federal Reserve will cut interest rates this year as a precautionary measure to maintain U.S. economic growth.

While many of the other financial service firms we cover, especially those that depend on net interest income, have been emphasizing expense control, Evercore is continuing to invest in its business. At the end of the second quarter, the company had 107 senior managing directors in its advisory business that were either already at the firm or had announced that they would join the firm. This compares with 98 advisory senior managing directors at the end of 2018. While increasing senior managing director headcount increases the long-term value of the company, it could lead to earnings pressure during a downturn if the company has to increase its compensation ratio to retain employees when revenue takes a dip.