Sector Watch: Small-cap financial firms
Global economic growth, low inflation and interest rates, and a surge in transnational investing are creating an ideal market for big financial deals. Mergers, buyouts and IPOs are occurring in record numbers and unprecedented sizes. Goldman Sachs officers indicate their company’s IPO pipeline is bigger than any time since the Internet boom, while Carlyle Group executives predict the market will soon see $100 billion in private equity deals. In 2007, the value of global mergers and acquisitions could reach $2.9 trillion, its highest level since 2000. The value of U.S. mutual funds could exceed $10 trillion, a 66% increase in four years.
The M&A boom is creating exceptional growth opportunities for boutique investment banking firms such as Evercore Partners Inc. (NYSE: EVR). Evercore Partners is primarily in the consulting business, helping large multinational corporations negotiate and complete mergers, acquisitions and spin-offs. This firm is successfully positioned as a boutique investment bank and a viable alternative to Wall Street’s major banks. These larger banks typically pitch clients on a variety of services such as loans and private equity deals in addition to consulting, sometimes creating conflicts of interest that make their advice appear less than objective. Corporate boardrooms, eager to avoid regulatory scrutiny and allegations of conflicts of interest, are increasingly hiring specialized firms such as Evercore Partners to avoid these bias issues.
While small compared to mainstream investment banks such as Goldman Sachs or Lehman Brothers, Evercore Partners has won many major M&A deals. Last year, the company advised AT&T Inc. (NYSE: T) on its BellSouth acquisition, Credit Suisse Group (NYSE: CS) on its sale of a business unit to AXA (NYSE: AXA), General Motors Corp. (NYSE: GM) on its sale of a 51% interest in GMAC and CVS Caremark Corp. (NYSE: CVS) on its Caremark acquisition. Deals announced during the March quarter include U.K. engineering company Smiths Group PLC’s sale of its aerospace division to General Electric Co. (NYSE: GE), IronPort Systems sale to Cisco Systems Inc. (Nasdaq: CSCO), Novalis’ sale to Hindalco and Aquila Inc.'s (NYSE: ILA) sale to Great Plains Energy Inc. (NYSE: GXP) and Black Hills Power.
Evercore Partners’ revenues increased 48% last year to $216.4 million, and pro forma earnings grew 81% to $40.5 million, or $1.27 per share. During the March quarter, revenues grew 105% year-over-year to $89.5 million, and per-share earnings more than doubled to $0.50. Evercore Partners is capitalizing on global business opportunities by expanding its business into Europe, Latin America and Japan. Assets under management increased to $458 million in the March quarter. Consensus analyst estimates target 44% growth for Evercore Partners next year and 15% annual longer-term growth. These shares are currently trading at a 16 forward P/E on estimated 2007 EPS. My $40 price target for Evercore Partners is 40% above the current price.
Sophisticated users of financial modeling tools include not only investment firms but also a growing class of “semi-professional” or very active traders. These traders make up approximately 10% of the brokerage industry’s customers and account for more than half of its trading activity. In addition to trading frequently, these customers maintain large account balances and utilize margins in their trading activity. Celent Communications estimates there are 750,000 to 800,000 active traders industry-wide who trade at least 50 times per year, 100,000 active traders who trade between 50 and 1,000 times per year, and 30,000 hyperactive traders who trade more than 1,000 times per year.
TradeStation Group Inc. (Nasdaq: TRAD) offers tools and services that appeal to very active traders and independent institutional traders. The company’s TradeStation platform enables direct market access for order execution and also allows clients to design, test, optimize monitor and automate their own customized equities, options futures and forex trading strategies. The TradeStation platform has been recognized by Technical Analysis of Stocks and Commodities magazine as the industry’s best futures brokerage platform, best institutional platform and best direct access stock brokerage platform.
TradeStation Group’s net earnings grew 47% last year to $31 million, or $0.67 per share. The company’s client account metrics are among the best in the industry; its average account trades 540 times per year, versus average trades of 10 times per year for the average E-Trade and TD Ameritrade account. TradeStation Group also has significantly higher average account balances at $80,000 for equities and $19,000 for futures.
TradeStation Group’s earnings jumped 18% year-over-year in the March quarter to $8.2 million, or $0.18 per share, and daily average revenue trades rose 19% year-over-year to more than 70,000. The company forecasts 2007 per-share earnings growth at between 10% and 25%. Consensus analyst estimates forecast 20% growth next year and 20% annual growth over the next three years. TradeStation Group was recently trading at a 17 P/E and a 13 forward P/E. My $17 price target for these shares is 40% above the current price.
