Houlihan Lokey: My number one financial investment (NYSE: HLI)

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Financial advisors know how to perform well

Trust is a great theme to base an investment on. Uncertainty, or a lack of confidence, can be reflected in volatile valuations, underperformance and poor overall financial condition. In the financial sector, this can be seen with the extremely low valuations and poor performance of major banks and corporates as historical issues weigh on investor sentiment. Therefore, it is important to choose a company that customers trust and that has multiple ways of reflecting stability and certainty. I believe Houlihan Lokey (NYSE: HLI) reflects that sentiment, and the company is my largest and only financial holding company.

HLI is a leading financial advisor with leading market share in several segments across the globe. In fact, HLI is the world’s No. 1 in mergers and acquisitions, restructuring, valuation and equity advisory, and private equity sponsorship. This puts HLI ahead of competitors such as Goldman Sachs (GS), JP Morgan (JPM), Moelis (MC) and Raymond James (RJF). I discuss the details of the company in depth in my first coverage, and would recommend getting the background details there. In this article, I will highlight the key reasons why HLI provides a level of certainty, both quantitative and qualitative, that investors can rely on.

A summary by Houlihan Lokey

HLI July Investor Presentation

There are some important qualities in HLI’s revenue mix that present qualities to look for. Financial services are not high growth sectors, so it will be important to assess how the business can offset volatility and cyclicality. The three main advantages are:

  • Diversification between industries reduces the risk associated with the cyclicality of the industry.

  • Leadership in deals under US$1 billion and a predominantly mid-size customer base reduce revenue volatility from individual deals.

  • Most clients are private companies and institutions, which reduces volatility due to advertising, market sentiment and transaction speed.

Diversification is key, as is flying under the radar. By focusing on mid-caps and private markets, HLI can continue to win praise within financial circles but not face the scrutiny of shareholders. I believe that if HLI were working on high profile cases, stocks would experience increased volatility. Additionally, while some worry about bear markets and economic downturns, HLI is unaffected by mergers and acquisitions and restructurings. As reported recently, bankruptcies are back on the rise after a hiatus during the pandemic, which will drag growth into the impending “recession”.

A summary of transactions by industry compared to peers

HLI July Investor Presentation

Income diversification according to different measures

HLI July Investor Presentation

There is financial data to support the ebb and flow of each revenue segment. As shown in the image below, financial restructuring revenue has only grown at an annual rate of 5% over the past five years, while corporate finance is booming. This creates an imbalance in the mix, but as the corporate finance market cools, restructuring will begin to grow again. However, due to the unique nature of the current bear market where most companies are in good financial health, mergers and acquisitions are keeping volumes high. According bath search:

Market value of M&A deals in trillions

Bath

Therefore, I expect solid growth to continue across the board for HLI, primarily with corporate finance. Then, if markets cool down from the high levels seen in recent years, restructurings could become the key segment. Fortunately, bear markets tend not to inhibit trading volume, and problems with HLI growth should eventually be limited. Take advantage of short-term pessimism and trust HLI to continue its uptrend. This would relate to historic CAGR revenue growth of around 15-17%, with recent growth exceeding that. Moreover, the strong growth has not come at the expense of profitability and, in fact, net profit margins have peaked in recent years.

Houlihan Lokey’s recent rise to market leadership in its business segments will support momentum that will exceed current growth expectations. Just look at how revenue was below $1 billion a year after HLI spun off from my second favorite financial company, Orix (IX), in 2015. Rising to over $2.7 billion in revenue per year has been quick, but no barriers to growth exist in my opinion. Remember that HLI does not suffer from AUM, interest rate or economic growth issues, and instead relies on advisory fees which may increase as HLI expands its prowess and expertise. at all abilities.

Growth broken down by revenue segment, commented

HLI July Investor Presentation

HLI revenue and growth data

Koyfin

HLI net income and fcf data

Koyfin

Growth often comes at a cost, but in the case of HLI, profits are unaffected and improve. Instead, we have to look elsewhere to address some potential downsides to recent performance. First, the company has a moderate dividend yield that hovers between 1% and 3%. In addition, the payout ratio varies by quarter, but averages between 40-50%. However, the dividend has increased steadily and there is no dilution for shareholders.

The reason for the decline in direct returns to shareholders is the result of frequent cash acquisitions to expand the capabilities of the business, and it is a better use of capital for long-term investors than buyouts. or higher yield. As the world’s leading financial advisor, HLI knows what it’s doing to keep its own business from failing, in my opinion.

HLI shareholder earnings data

Koyfin

A summary of recent acquisitions

HLI July Investor Presentation

Regardless of the exact growth rate or profit margin, I expect significant returns with a long position. Although HLI already holds significant market shares in its areas of expertise, the company continues to develop, particularly abroad. No debt and plenty of cash allow frequent accretive acquisitions to continue to extend their lead. If necessary, they can either forego acquisitions or continue to expand based on their market analysis. It is even possible to increase profits with higher fee services, which could do wonders for the valuation of the business.

A summary of future growth potential

HLI July Investor Presentation

Expenditure, balance sheet and cash management data

HLI July Investor Presentation

Even with an increase of more than 300% over the past 7 years, HLI is currently experiencing a low valuation. Although the company has the unfortunate risk of trading online with other financial companies, this only gives shareholders an opportunity to add at a bargain price. However, the volatility is not as extreme as that of other assets and recurring investments are likely to yield good long-term results. As such, I will be looking to see HLI continue to extend significant outperformance versus financial funds, such as the SPDR Financial Select Fund (XLF). Unfortunately, we can only look back on the 2015 valuation metrics, and that doesn’t indicate where a valuation low point may go, but I remain confident of the company’s ability to survive a market. prolonged bearish.

Yield and HLI valuation

Koyfin

Do you also think Houlihan Lokey’s finances allow for a high level of trust between investors and the company? The market seems to agree as HLI’s valuation remains one of the highest in the industry. However, I expect significant outperformance regardless of price and will add on a recurring basis. In fact, I will be looking to make HLI one of the top 3 holdings in my portfolio (especially since a few of my holdings have been purchased recently). I will emphasize that it is best never to be completely comfortable, so I will check finances regularly. Stay tuned for more updates along the way.

Thanks for reading.

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