Evercore Earnings: Earnings Currently Weak but Should Have a Strong Recovery in Next 1 to 2 Years

As expected, Evercore EVR had another relatively weak quarter, but we continue to believe that earnings will stage a strong recovery in the next 1 to 2 years. The company reported earnings to common shareholders of $52 million, or $1.30 per diluted share, on $570 million of net revenue. Net revenue was down 1% from the previous year, 14% higher from the previous quarter but about 20% lower than the trailing three-year average. Economic uncertainty and higher interest rates have weighed on revenue. While the management teams of investment banks seemed more optimistic the previous quarter before the “higher for longer” interest rate outlook emerged and the recent Israel-Hamas war, U.S. economic indicators are still fairly healthy, which should support a recovery in mergers and acquisitions advisory revenue in the next year or so. We don’t anticipate making a material change to our $171 fair value estimate for Evercore and assess shares are modestly undervalued.

While we believe the medium term is bright, the next several quarters could still be relatively gloomy. As we mentioned the previous quarter, Evercore has ramped up its hiring of senior managing directors, and this will pressure earnings, as it will likely take more than a year for these hires to generate meaningful revenue. While not generating much revenue, the company will be incurring compensation costs on those employees, and the company’s compensation ratio will be elevated. Management said that the company has more than 40 senior managing directors, out of 175 total with 137 in the advisory business, that are relatively new and ramping—137 advisory senior managing directors is materially higher than the around 110 the company had at the end of 2019. With the larger base of revenue-generating employees, we currently forecast the company earning over $12 per share in 2025, compared with potentially less than $7 this year.