Houlihan Lokey, a boutique investment bank in the United States, has shown signs of recovery, but caution is still advised when considering an investment in its stock. While the company has experienced improvement in various segments, the current valuation is not attractive. It is recommended to wait for at least two quarters before making any investment decisions.
The corporate finance segment of Houlihan Lokey has reported high levels of client engagement and new business activity across all sectors. This indicates a growing agreement between buyers and sellers on business transactions. Additionally, the restructuring business has performed well, with management expecting a new revenue cycle. Notably, the market for mergers and acquisitions (M&A) and the hiring environment have both improved, signaling further indications of recovery. However, it is important to exercise caution and wait for a longer period to evaluate the sustainability of these positive trends before making any investment decisions.
Although revenues have not fully bounced back, the rate of decline has significantly slowed down from -59% in the third quarter of 2023 to -8% in the fourth quarter of 2023. This suggests a potential return to normalcy. Management has also expressed optimism about growth in Europe and expects the slowdown in private equity deals to become a strong tailwind for Houlihan Lokey. The company’s restructuring business is expected to continue growing as companies seek methods to address imminent debt maturities in the coming years.
In terms of financial decisions, Houlihan Lokey has increased its quarterly dividend by 2 cents to 55 cents. While this increase may not meet some investors’ expectations, it is a wise move to prioritize cash preservation for future deployment. It is also expected that the company will reduce its share buybacks, as the return on investment in buying its own shares is not attractive at 4x book value.
The current valuation of Houlihan Lokey is not particularly appealing, and the market seems to be projecting a recovery by fiscal year 2025 based on consensus estimates. While positive signs of recovery are becoming clearer, it is important to remember that uncertainties still exist, and unexpected events could occur in the next two quarters that might impact the positive trend. The consensus view on recovery timing has also driven the 1-year forward price-to-earnings ratio to 19x, which is higher than the historical average. If the anticipated recovery does not materialize, the stock may experience multiple reversion to align with consensus expectations. However, if growth continues to remain strong across segments for a few more quarters, it may be a sign to consider Houlihan Lokey as a potential investment opportunity.
One of the main risks for Houlihan Lokey is the war for talent. The company highly values its personnel as its most valuable resource, and any mass exodus of workers would have a detrimental effect on the company’s operations.
Overall, while there are early signs of recovery for Houlihan Lokey, it is advised to remain neutral and exercise caution before making any investment decisions. The corporate finance segment is showing improved client engagement and new business activity, and the potential for growth in Europe. The slowdown in private equity deals could potentially benefit the company, although the timing of this acceleration remains uncertain. The restructuring business is performing well in the current economic downturn. Houlihan Lokey’s focus on preserving cash indicates preparedness for future opportunities. However, the current valuation is not appealing, and the market’s expectations for recovery by fiscal year 2025 may lead to multiple reversion if the anticipated recovery does not occur. It is recommended to wait for at least two quarters to observe further developments and assess the company’s potential for investment.
