Wednesday, April 8, 2009

Bookkeeping: Starting Greenhill & Co (GHL)

I've been watching the 'boutique' investment firms for about half a year contemplating an investment. These companies are smaller (much) versions of a Goldman Sachs type of firm, but without the hedge fund/trading desk/prime brokerage arms of the business. Basically they do a lot of transaction type of work such as mergers and acquisitions, restructuring, et al...

As the capital markets recover from the absolute dearth of IPOs, mergers, and the like we've seen most of the past year these companies should benefit. Further, this is a business about connections and human capital. Many sharp people are fleeing the larger firms and moving to these smaller firms....

WSJ: For Boutiques, Time to Shop as Bankers Flee Big Firms
  • President Barack Obama's new proposals on banker pay were a striking reminder of just how the balance of power is changing on Wall Street -- away from the big banks reliant on federal aid and to foreign-based or boutique firms that haven't required any bailout money.
  • For years bankers often vied to work for the firms with the biggest, most prestigious names. Now, investment bankers are wary of signing up for several more years of reduced bonuses, public shame by politicians and the other perceived consequences of taking government money. They are sending out résumés and making calls to smaller investment banks -- often called "boutiques" for their smaller size. Many who left boutiques to seek their fortunes at larger firms are returning.
  • In 2008, one boutique bank, Greenhill & Co., hired 14 managing directors, each with two decades or more of experience. "Last year was a great recruiting year for us. It's clear that in the first few weeks of 2009 we're in an even better recruiting environment than we were last year. It's an absolute flood of inquiries," said Scott Bok, Greenhill's co-chief executive.
WSJ: Boutiques are Winning the Battle of the Bulge
  • Specialized investment banks that offer restructuring advice have an opportunity to dance around their sometimes-conflicted competitors. Many boutiques have weathered the credit crisis relatively well thanks to small balance sheets, free of toxic assets. Now, those models could pay off again as boutiques are hired for restructuring work -- while some bulge-bracket banks struggle because they are conflicted.
  • Creditor banks are prohibited from advising firms that have filed for bankruptcy protection because their interests mightn't be aligned with the company's. And banks needn't be direct lenders to be considered creditors. Investments in credit derivatives also could hinder them from keeping "disinterested party" status. That could lead troubled firms to use the likes of Lazard and Greenhill & Co., with little or no lending.
  • Restructuring now accounts for a small portion of revenue at many boutiques, but the amount will probably swell when bankruptcies pick up. Fees from restructuring accounted for about 40% of Greenhill's total advisory revenue in 2003 and 2004, after the technology bubble burst, says UBS analyst Glenn Schorr.
The three main public names in this group in order of market cap are Greenhill & Co (GHL), Lazard (LAZ), and the quite small Evercore Parterns (EVR). Lazard is the cheapest but also has the worst chart... I'd consider building a basket of 2 or all 3 names, but instead have decided to go with best of breed with Greenhill & Co - even if its more pricey than Lazard. As for Evercore - with the tracking system I use on I need to stick to stocks with decent volume since the mechanics of the system only use a portion of real world trading volume (so you can't game the system) - so with only 150K shares traded a day, it is a hard stock for me to move in or out of. So the decision is actually pretty simple on which one to go into.

Those are the long term charts - as you see with Greenhill & Co it has been in a massive range, mid $50s on the bottom and low $70s on the top, that it finally broke out of of late.

After exploding higher to $80, the stock has pulled back to its 20 day moving average where I am making an initial stake of 1%. I'd like to add at $65 and indeed if it gets back to mid $50s, I am going to add more. This will go against the normal technical trading I do, but the mid $50s is such a clear level to buy I am going to use a different strategy in this name particulary. I do like buying this sort of chart, where a long base has been built, and then an explosive move out of this base happens. Normally you do not get a chance to buy after that breakout since in normal markets these moves continue upward and onward, but of course nothing is normal about our current market.

Greenhill & Co is in no way cheap but has a bulletproof balance sheet and it has been lifting some major talent out of the big name investment firms and in this sort of business that is golden.

Quick summary of Greenhill's last earnings
  • Greenhill & Co., Inc. (NYSE: GHL - News) today reported revenues of $221.9 million and net income of $49.0 million for the year ended December 31, 2008. Diluted earnings per share were $1.74 per share for the year ended December 31, 2008.
  • The Firm's 2008 revenues compare with revenues of $400.4 million for 2007, which represents a decrease of $178.5 million or 45%. The Firm's 2008 net income and diluted earnings per share compare with $115.3 million of net income and $4.01 of diluted earnings per share, respectively, for the year ended December 31, 2007, representing decreases of 58% and 57%, respectively.
  • Recruited 14 Managing Directors during 2008; total Managing Directors now 48
  • In 2008, we again produced industry leading revenue productivity, pretax profit margins and returns on equity, despite investing in our franchise by adding three new offices and increasing our Managing Director count by an extraordinary 40%.
  • In addition, our balance sheet has remained simple and transparent, our robust dividend has been maintained and we ended the year with cash balances in excess of our modest debt, leaving us well positioned for future challenges or opportunities," Scott L. Bok, Co-Chief Executive Officer, said.
  • We earned advisory revenue from 65 different clients in 2008, compared to 74 in 2007. We earned $1 million or more from 37 clients in 2008, compared to 47 in 2007. The ten largest fee-paying clients contributed 54% to our total revenues, and none of those clients had in any prior year been among our ten largest fee-paying clients. One client represented approximately 10% of total revenues in 2008 and one client represented 12% of total revenues in 2007.
Again 2008 was a disastrous year in terms of revenue and profit drops but no toxic assets to be found here; unlike most of the "thesis" and "green shoot" buying, I do actually believe in the upside that could happen here. Further, I think Wall Street and capital markets will improve ahead of Main Street which is in for many years of a "new normal"... hence I'd rather buy a company in this niche than paying 25x for a retailer ...

As I said yesterday I am trying to marry long positions with shorts, and continue to build out a portfolio of individual names. Relatively neutral on the market overall and expect a lot of choppiness, so the very equally hedged strategy is the one I am sticking to for now.

Long Greenhill & Co in fund; no personal position

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