Houlihan Lokey: Will the Share

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Can you make money by owning part of a business that deals with money? If that company is Houlihan Lokey Inc. (HLI, financial), then, yes, you probably can.

Over the past three years, it has increased its earnings per share without non-recurring items by 38.40% per year on average. And over the past decade, revenues have grown 26.44% per year.

Normally, we would expect earnings growth to drive the stock price higher, but it was dragged down by the market’s downtrend and the stock price fell rather than falling. increased. This makes it undervalued, but don’t consider this a value trap as it has an excellent set of fundamentals.

It also offers a higher dividend yield than the S&P 500, but beware of stock issue dilution.

About Houlihan Lokey

Based in Los Angeles, the firm is one of America’s largest investment banking firms. In an investor presentation in July, he claimed to be a market leader in several areas, including these:

Source: Presentation of the company.

As a $5.30 billion company, it is much smaller than some companies it competes with. Three of the public companies referenced in the first column of this slide—Goldman Sachs (GS, Financial), JPMorgan Chase & Co. (JPM, Financial) and Morgan Stanley (MRS, Financial) – have market caps of over $100 billion.

It operates through three segments:

  • Corporate Finance, which includes mergers and acquisitions and capital markets advisory.
  • Financial restructuring, which manages out-of-court and formal bankruptcy or insolvency proceedings.
  • Financial Advice and Valuation, offering financial advice and a variety of financial valuation and advisory services.

As this excerpt from a 10-K chart (for the year ended March 31) shows, corporate finance is the big earner, and especially over the past year.

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Competition

With the possible exception of financial regulations, there are few barriers to entry into the financial services industries, so it’s no surprise that Houlihan Lokey has a long list of competitors:

  • For Corporate Finance, the main listed competitors are Jefferies LLC (I F, Financial), Lazard Ltd (LAZ, financial) and Moelis & Co. (CM, Financial), as well as the so-called bulge-bracket investment banking firms (industry giants).
  • The financial restructuring facing Evercore Partners (RVE, Financial), Lazard and Moelis & Co.
  • For financial and valuation advice, named competitors included the “big four” accountancy firms as well as Duff & Phelps Corp. (DPG, Financial) and various global financial advisory and accounting firms.

He argued in his 10-K that he had competitive advantages: “The majority of our engagements are in mid-cap transactions, which we believe is an attractive segment that is underserved by investment banks. large size. We believe that our deep industry expertise, the significant involvement and focus of our senior bankers, our strong relationships with financial sponsors and our global platform deliver unquestionable value to our clients, engendering long-term relationships and delivering an advantage. competitive with our peers in this segment of the market. ”

Backing up that claim, it has industry-reasonable margins and a performance record that beats two key benchmarks.

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Financial solidity

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At 8 out of 10, this is a surprisingly low ranking for a company that has essentially no debt (no short-term debt and only $1 million in long-term debt). The company has a $100 million line of credit, but had no principal outstanding as of March 31.

As we see in the chart, it has a high Altman Z-Score of 5.39, indicating that no faults are likely. Additionally, the Piotroski F-Score of 6 out of 9 is reasonable, suggesting that the company’s overall financial management is sound.

Houlihan Lokey is also a value creator, as shown by the WACC versus ROIC ratio. The weighted average cost of capital is only 4.82%, while its return on invested capital is 27.85%.

Profitability

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When it comes to profitability, the company received a 9 out of 10 rating from GuruFocus.

Looking below the surface at a few of these yellow bars, we get some interesting relationships with the capital markets industry. First, Houlihan Lokey has a gross margin of 37.73% while the industry median is 48.50%, a significant difference. Second, the company’s net margin is 18.25%, which is significantly higher than the industry median of 13.56%.

Return on equity and other returns all dominate the industry, and also note that the company has been profitable in nine of the past 10 years. In other words, it has been relatively stable throughout economic cycles.

Growth

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The growth ranking is also high at 9 out of 10. There’s a lot to like about this chart, starting with its revenue, EBITDA and profit growth. Over the past decade, revenue growth has averaged 17.22% per year, while Ebitda has averaged 23.53% and earnings per share excluding one-time items have increased by 26. 44% per year. These are all good metrics, especially since earnings per share without NRIs have grown faster than revenues over the past three years and the past 10 years.

Even better is the free cash flow growth rate.

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Dividends and share buybacks

Plenty of free cash flow means ample funds for expansion, stock buybacks and dividends.

And, yes, the company has significantly increased its dividend per share, increasing it by 28.20% over the past 12 months and by an average of 18.80% per year over the past five years. This is a very good rate for shareholders who want income, but it doesn’t push the dividend payout ratio too much.

According to Nasdaq’s S&P 500 Dividend Yield by Month page, the average yield for the S&P 500 was 1.62% at the end of September. As we see, Houlihan Lokey’s yield is well above 2.47%.

But some of that return was diluted by the continued growth of shares outstanding. Since 2015, he has increased the number of shares outstanding, presumably to deal with stock and option awards to management and staff.

Evaluation

Houlihan Lokey’s stock price suffered the same fate as many other currently undervalued stocks: it was dragged down by external events, including geopolitical and economic shocks. Despite this, long-term shareholders benefited from good capital gains.

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The GF value line considers the stock to be slightly undervalued based on historical ratios, past performance and future earnings projections, suggesting that the intrinsic value should be $109.08 (relative to its trading price). October 10 close of $77.99).

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Its price/earnings ratio is 12.74, slightly below the industry median of 13.89. The price-to-earnings ratio divided by the five-year Ebitda growth rate, or PEG ratio, is 0.50, well below the industry median of 1.11 and fair value of 1.

Summary of Fundamentals

Overall, the company’s GF score of 92 out of 100 indicates it has high outperformance potential. It received excellent ratings for its Growth, Profitability and GF Value categories.

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Gurus

Five gurus held stakes in Houlihan Lokey in late June. The three largest belonged to:

  • Ron Baron

    (Businesses, Portfolio) of Baron Funds; it cut back slightly, around 0.01%, to end the quarter with 1,300,895 shares. They represented 1.89% of the company’s outstanding shares and 0.33% of the fund’s holdings.
  • chuck royce

    (Trades, Portfolio) of Royce Investment Partners made no changes and continued to hold 231,260 shares.
  • John Rogers

    (Trades, Portfolio) from Ariel Investment added 12.84% and ended the first half of 2022 with 142,312 shares.

Institutional investors held just under two-thirds of Houlihan Lokey’s shares, 64.14% to be precise. Insider ownership was low at just 0.12% and neither CEO Scott Beiser nor CFO J. Lindsey Alley appear to own any shares.

Conclusion

There are now plenty of quality stocks within reach for value investors, as the broader market has fallen so far since late last year. Houlihan Lokey is one such company, with strong fundamentals, a dividend and potential capital gains.

Eventually, we can expect the stock price to catch up with earnings growth, and when that happens, investors could enjoy profitable returns.

Given its insignificant debt and struggling stock price, value investors may want to take a closer look. And assuming the stock price follows earnings, sooner or later it may be worth the attention of growth investors. Although Houlihan Lokey appears to offer a good dividend yield, income investors should remember the dilution factor.

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