Stock Report: Greenhill & Company (GHL)

Stock Report: Greenhill & Company (GHL) - HE GHL table 11 21 13

THE HEDGEYE EDGE

The Hedgeye Financial Sector team’s detailed and constructive view on the improving fundamentals in the mergers and acquisition market (M&A) with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. That is clear.

 

From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. These are positive trends for companies in the M&A space.

 

Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL going forward.  So would a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years.

 

GHL stands out as a leading beneficiary of these developments.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

This idea will best be played out by the middle of 2014. We will know then whether our research and investment thesis has been accurate. To be sure, there have been multiple “fits and starts” on a short term basis in M&A activity. But by the middle of next year, investors will have a better idea if our bullish call here has actually held water.

 

LONG-TERM (TAIL) (the next 3 years or less)

The tail for an M&A shop like Greenhill is not overly exciting unless there is a massive upsweep to new highs in M&A activity (which we are not forecasting). These M&A stocks are hyper-cyclical and need to be “rented.” Why? Because every time they execute a deal, that decreases forward demand for incremental activity. In addition, M&A is also a “relationship business” and management changes can change advisory pipelines.

 

Moreover, these companies are not overly shareholder friendly with no “book value” build per se. The companies award a lot of RSUs for employees, but don’t really build NAV for shareholders so hence these are trading vehicles or “rented” stocks.

 

ONE-YEAR TRAILING CHART

Stock Report: Greenhill & Company (GHL) - HE GHL chart 11 21 13