THE HEDGEYE EDGE
We believe shares of investment bank Moelis (MC) will ultimately be negatively impacted by an increasingly difficult environment for M&A. Moelis is the most at risk within the M&A sub-industry as the company is set to record the largest year-over-year decline in the M&A subgroup.
REVIEWING THE 4Q17 RESULTS
Moelis reported slack in its fourth quarter earnings recently with top line revenues of $169 million declining -17% over the 4Q16 period. This decline was flagged by our Boutique Activity Tracker (BAT) as MC specific activity has been trending behind expectations all quarter. From an earnings standpoint, MC reported $0.52 in EPS, which comped to the $0.66 per share from last year in 4Q16.
Volatility and equity price declines historically dry up strategic M&A activity so the current environment bears watching for an more intermediate term impact to the mid cap M&A advisors.
OUR BOUTIQUE M&A ACTIVITY TRACKER
Our Boutique Activity Tracker (BAT) compiles merger and acquisition (M&A), restructuring, and capital markets advisory information from the webpages of the leading boutique advisory firms. Our objective is to shed light, by employing an alternative data set methodology, on what can be opaque intra-quarter information for the M&A sub-industry. We have compiled data from the webpages of Lazard (LAZ), Evercore (EVR), Moelis (MC), and Greenhill (GHL), having established five years of activity data for each firm.
For the pending 4Q17 period, our tracker indicates that the M&A sub-industry is running below pace from a year-over-year standpoint, with fourth quarter activity in 2017 falling below 4Q16 production levels. With heightened activity in the recent December period however, the M&A subgroup will at least out comp its sequential quarter-over-quarter production, an outcome which looked uncertain last month in November with weak activity. The year-over-year decline for each adviser is consistent with the ongoing rollover of industry revenues from the peak in 2015.
Moelis stands most at risk from an activity decline in its upcoming 4th quarter report. The firm was involved in just 36 assignments worth $38.7 billion this past quarter, essentially flat compared to the 39 deals worth $38.8 billion completed in 3Q17. Most importantly, having completed 52 deals totaling $68.5 billion in 4Q16, MC is set to record the largest year-over-year decline in the M&A subgroup.
Hence, our tracker outlines that MC will experience the largest miss in the M&A subgroup for 4Q17 when it reports earnings on February 11th, with consensus looking for $0.60 in EPS or flat year-over-year despite the -30% decline in deal count and the -40% decline in notional deal value year-over-year.