Posts
Thursday, March 26, 2009
Greenhill on a roll
Greenhill (Ticker GHL) announced another MD hire today, bringing the YTD number to five. My projections were for them to hire ten in 2009 so they are already half way there. For those that own it, I would start to think of the position as a source of funds if it goes above $85 within the next month or two. The stock can go higher, but I think you can find better risk/rewards in other stocks at that point. I wouldn't initiate a new position at these prices, but I am sticking with my position for now.
Monday, March 23, 2009
Toxic Assets, Expectations and an Anecdote
If you have read my prior posts, you know that I am bullish on stocks and consider this a good time to be allocating into equities. There are four things I want to highlight today to bolster that argument. Namely, the Treasuries Toxic Asset Plan announced this morning, Tiffany reported better than expected results, and a conversation I had last week that startled me.
First the Toxic Asset Plan. Treasury Secretary Geithner announced a plan to partner with private investors to to create investment entities that will bid on pools of toxic assets with financing assistance from the government. There is a factsheet on the Treasury's website so I won't rehash it here. In a prior post I mentioned that I was optimistic because I thought the government was finally trying to address all five of the key issues needed to return to a more normal financial and economic footing. They were to: recapitalize the banks, remove toxic asset overhang, find a bottom in housing prices, slow consumer deleveraging, and try to create jobs. Whether this toxic asset plan will work is still debatable, but we have a concrete plan of action from the government and I think that is a positive step. There is real movement on all five areas now.
Second, Tiffany & Co reported bad Q4 results, but they were better than analyst estimates and the stock was up about 5% at the open. I don't cover consumer stocks very closely, but I feel like I am seeing more headlines where things were not as bad as projected. Before things get better, they get less bad, and I think that is what we are starting to see.
Third, and I think most interesting, I talked to a friend of mine last week who told be that they were still being swamped with requests from wealthy households to sell stocks and buy bonds. I found it shocking that investors that have lost so much in equities would now decide to lock in low interest rates and effectively give up the opportunity for capital gains from here. I asked my friend if he was serious. He said that investors were not thinking about how to regain some of the money they lost, they were just trying to prevent further loss. I knew this reallocation had been happening, but I guess I thought it had mostly run its course. There continues to be selling pressure on equities from this type of activity, yet the market has bounced about 18% off its March 9th low. The fear remains, but I think we are running out of sellers.
First the Toxic Asset Plan. Treasury Secretary Geithner announced a plan to partner with private investors to to create investment entities that will bid on pools of toxic assets with financing assistance from the government. There is a factsheet on the Treasury's website so I won't rehash it here. In a prior post I mentioned that I was optimistic because I thought the government was finally trying to address all five of the key issues needed to return to a more normal financial and economic footing. They were to: recapitalize the banks, remove toxic asset overhang, find a bottom in housing prices, slow consumer deleveraging, and try to create jobs. Whether this toxic asset plan will work is still debatable, but we have a concrete plan of action from the government and I think that is a positive step. There is real movement on all five areas now.
Second, Tiffany & Co reported bad Q4 results, but they were better than analyst estimates and the stock was up about 5% at the open. I don't cover consumer stocks very closely, but I feel like I am seeing more headlines where things were not as bad as projected. Before things get better, they get less bad, and I think that is what we are starting to see.
Third, and I think most interesting, I talked to a friend of mine last week who told be that they were still being swamped with requests from wealthy households to sell stocks and buy bonds. I found it shocking that investors that have lost so much in equities would now decide to lock in low interest rates and effectively give up the opportunity for capital gains from here. I asked my friend if he was serious. He said that investors were not thinking about how to regain some of the money they lost, they were just trying to prevent further loss. I knew this reallocation had been happening, but I guess I thought it had mostly run its course. There continues to be selling pressure on equities from this type of activity, yet the market has bounced about 18% off its March 9th low. The fear remains, but I think we are running out of sellers.
Tuesday, March 17, 2009
Greenhill - a great franchise, buy at $60
Greenhill (Ticker: GHL)
Who they are: Greenhill is a NYC-based investment bank that focuses on Corporate Advisory (both M&A and restructuring), Merchant Banking and a newer Funds Placement business. As of 3/17/2009, they have 52 managing directors around the world.
Investment Thesis:
-M&A is cyclical and will return in the future, at which point investors will pay 20x estimates for this high quality pure-play.
-Unlike bulge bracket rivals, Greenhill has remained a low-capital-intensive business. Advisory has almost no capital requirements, and merchant banking has low capital requirements (which are not levered up).
-Greenhill's boutique business model is in favor and will gain prominence given the tarnished image of the bulge brackets and fewer conflicts of interest when working with Greenhill.
-They are attracting the best and brightest amid the market turmoil.
-They have won some very high profile assignments that bolster their industry standing among corporate chieftains.
-I have tremendous respect for Bob Greenhill and Scott Bok, and think they have built a differentiated culture that will serve clients, employees and shareholders well.
-I like this stock under $60 per share.
Catalysts/Risks:
-Need to hire about 10 top-notch MDs in 2009 or investors will be disappointed.
-Merchant Banking will try to raise GCP III this year and was hoping for $1b; +/- will be noted.
-GCP II is 80% invested since being raised in 2005. While it appears they were more prudent with leverage than the industry, there is mark-to-market risk at a minimum.
-Additional high profile assignments in advisory. Getting the lead role to Roche on its Genentech merger was a big deal. Investors will be looking for signs it wasn't a one-timer.
-Can their culture survive and thrive as they grow? I think so, but this is a risk.
Math/Assumptions:
-I assume that at the end of 2010, investors will pay 20x for a normalized earnings power estimate because the M&A cycle will be re-accelerating and Greenhill is a high quality way to get pure-play exposure to that cycle.
-I assume they will start 2011 with 63 managing directors which can each generate $8 million in revenue, and that on a normalized basis, merchant banking will contribute 15% of total revenue. (I assume no interest income for conservatism sake)
-I assume compensation expense ratio of 46% and a non-comp expense ratio of 15%, for an operating margin of 39%.
-With a 35% tax rate, that gives me $150 million in net income for normalized 2011 ($5 in EPS with a 30m sharecount)
-That implies the market will pay right around $100 per share at the end of 2010 and I want a 30% CAGR to that price. Discounting back to today means I like this stock at about $60 per share.
A note on culture:
Culture is a tricky thing to analyze because it is inherently subjective, but it is often very important. I think Greenhill is an example of a company where they have been very deliberate about their culture and where I think it is a competitive advantage. Most i-banks have cut-throat environments where the MDs bring in the business and operate at a very high level, but leave most of the execution and detail to their subordinates. Compensation is often opaque and there is very little collaboration among MDs.
Greenhill has built a culture of collaboration, execution and meritocracy. MDs at Greenhill routinely help each other find contacts in the course of completing and sourcing deals. As Scott Bok said, if an MD turns out not to be a team player, they will be drummed out of the firm. Additionally, a rival firm might send ten people to a board meeting, each of which is competing for air time to demonstrate their sliver of knowledge on the deal. Greenhill sends a couple people with the MD knowing the whole story because they have been involved in the execution. Greenhill looks for MDs that want to be involved with completing deals, not just golfing with CEOs to source deals. Finally, every MD knows the compensation for every other MD. This creates a culture of meritocracy where the new hires know they can be paid for their performance and the veterans know they have to justify their compensation in the eyes of their peers. Maybe I'm drinking the corporate cool-aid, but I can see why a CEO would prefer to work with Greenhill.
Word of caution:
I think buying GHL at $60 or less will provide a nice return by the end of 2010, but recognize that the fundamentals in the M&A and Merchant Banking business are at the bad part of their cycle right now. It is probable that there will be bad news between now and the end of 2010. I guess I'm trying to warn investors that the fundamentals could be extremely volatile on this stock and therefore the stock price may be extremely volatile as well. When I try to model this company I don't even bother to forecast an EPS number for 2009 or 2010 for the reasons I just mentioned. Just understand the type of investment this is before you buy it.
Who they are: Greenhill is a NYC-based investment bank that focuses on Corporate Advisory (both M&A and restructuring), Merchant Banking and a newer Funds Placement business. As of 3/17/2009, they have 52 managing directors around the world.
Investment Thesis:
-M&A is cyclical and will return in the future, at which point investors will pay 20x estimates for this high quality pure-play.
-Unlike bulge bracket rivals, Greenhill has remained a low-capital-intensive business. Advisory has almost no capital requirements, and merchant banking has low capital requirements (which are not levered up).
-Greenhill's boutique business model is in favor and will gain prominence given the tarnished image of the bulge brackets and fewer conflicts of interest when working with Greenhill.
-They are attracting the best and brightest amid the market turmoil.
-They have won some very high profile assignments that bolster their industry standing among corporate chieftains.
-I have tremendous respect for Bob Greenhill and Scott Bok, and think they have built a differentiated culture that will serve clients, employees and shareholders well.
-I like this stock under $60 per share.
Catalysts/Risks:
-Need to hire about 10 top-notch MDs in 2009 or investors will be disappointed.
-Merchant Banking will try to raise GCP III this year and was hoping for $1b; +/- will be noted.
-GCP II is 80% invested since being raised in 2005. While it appears they were more prudent with leverage than the industry, there is mark-to-market risk at a minimum.
-Additional high profile assignments in advisory. Getting the lead role to Roche on its Genentech merger was a big deal. Investors will be looking for signs it wasn't a one-timer.
-Can their culture survive and thrive as they grow? I think so, but this is a risk.
Math/Assumptions:
-I assume that at the end of 2010, investors will pay 20x for a normalized earnings power estimate because the M&A cycle will be re-accelerating and Greenhill is a high quality way to get pure-play exposure to that cycle.
-I assume they will start 2011 with 63 managing directors which can each generate $8 million in revenue, and that on a normalized basis, merchant banking will contribute 15% of total revenue. (I assume no interest income for conservatism sake)
-I assume compensation expense ratio of 46% and a non-comp expense ratio of 15%, for an operating margin of 39%.
-With a 35% tax rate, that gives me $150 million in net income for normalized 2011 ($5 in EPS with a 30m sharecount)
-That implies the market will pay right around $100 per share at the end of 2010 and I want a 30% CAGR to that price. Discounting back to today means I like this stock at about $60 per share.
A note on culture:
Culture is a tricky thing to analyze because it is inherently subjective, but it is often very important. I think Greenhill is an example of a company where they have been very deliberate about their culture and where I think it is a competitive advantage. Most i-banks have cut-throat environments where the MDs bring in the business and operate at a very high level, but leave most of the execution and detail to their subordinates. Compensation is often opaque and there is very little collaboration among MDs.
Greenhill has built a culture of collaboration, execution and meritocracy. MDs at Greenhill routinely help each other find contacts in the course of completing and sourcing deals. As Scott Bok said, if an MD turns out not to be a team player, they will be drummed out of the firm. Additionally, a rival firm might send ten people to a board meeting, each of which is competing for air time to demonstrate their sliver of knowledge on the deal. Greenhill sends a couple people with the MD knowing the whole story because they have been involved in the execution. Greenhill looks for MDs that want to be involved with completing deals, not just golfing with CEOs to source deals. Finally, every MD knows the compensation for every other MD. This creates a culture of meritocracy where the new hires know they can be paid for their performance and the veterans know they have to justify their compensation in the eyes of their peers. Maybe I'm drinking the corporate cool-aid, but I can see why a CEO would prefer to work with Greenhill.
Word of caution:
I think buying GHL at $60 or less will provide a nice return by the end of 2010, but recognize that the fundamentals in the M&A and Merchant Banking business are at the bad part of their cycle right now. It is probable that there will be bad news between now and the end of 2010. I guess I'm trying to warn investors that the fundamentals could be extremely volatile on this stock and therefore the stock price may be extremely volatile as well. When I try to model this company I don't even bother to forecast an EPS number for 2009 or 2010 for the reasons I just mentioned. Just understand the type of investment this is before you buy it.
Sunday, March 8, 2009
My apologies
My weekend has turned out busier than I planned and I am getting sick and feel horrible. I'll get the GHL write up done as soon as possible, but it won't be this weekend.
Friday, March 6, 2009
Buy Greenhill (Ticker GHL)
I will write this up in more detail over the weekend, but I saw a press release that I have been waiting for and was worried wouldn't happen. Greenhill announced the hiring of two managing directors (one in NYC on one in London) to head its restructuring business. They have indicated they were planning to do this, but it took longer than I thought it would.
In the interest of getting this out before market close; this is an excellent company that will be worth a lot of money when the M&A market returns (and it will return). I like this stock below $60 and it is $56 now. If you already know the story, buy now. Otherwise wait for the better write up this weekend.
In the interest of getting this out before market close; this is an excellent company that will be worth a lot of money when the M&A market returns (and it will return). I like this stock below $60 and it is $56 now. If you already know the story, buy now. Otherwise wait for the better write up this weekend.
Thursday, March 5, 2009
Straying from my focus a bit
I have purposefully kept this blog focused on investments and economics, but I have been watching the socialist tide rising like so many others. I wanted to share one of the more thought-provoking quotes on democracy I'm aware of; just something to mull over again (or for the first time if this quote is new to you).
I first heard this quote in college and it has always struck a chord with me. I am a capitalist at heart, and think the best road to rising standards of living is to incentivize society's best and brightest to create, innovate, and take risk by allowing them to keep the vast majority of the rewards they generate. I'm not against safety nets, but I tend the think they are too generous in this country.
So here is the quote. I did a quick google search and it sounds like the author is unknown although it is usually attributed to Alexander Tytler.
"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."
I guess I'm not as fatalistic about our future as this quote suggests I should be, but I do think it is a real tendency and conflicts with my capitalist views expressed above. Of course, if we vote ourselves largesse from the public treasury, that requires higher taxes on the wealthy minority who get outvoted. Surprise, surprise; it is often that wealthy minority who are the innovators, creators, and risk takers in our society.
It occurs to me that the most powerful offsetting force is the desire of most people to have the possibility of becoming very successful and wealthy. A socialist should never allow the lottery because it exposes our willingness to sacrifice current benefits for the chance at great wealth. In the same way, I think many of us prefer less assistance from our government in return for getting to keep more of our gains if we manage to generate great wealth.
Finally, and I hate to even bring this up, but I am not opposed to the estate tax because I think it encourages the successful to use their wealth in their lifetime, which is good for the broader standard of living, and because I do not think a massive inheritance encourages innovation, creativity and risk-taking. I've gone back and forth on this issue over the years, but this is were I stand now.
I first heard this quote in college and it has always struck a chord with me. I am a capitalist at heart, and think the best road to rising standards of living is to incentivize society's best and brightest to create, innovate, and take risk by allowing them to keep the vast majority of the rewards they generate. I'm not against safety nets, but I tend the think they are too generous in this country.
So here is the quote. I did a quick google search and it sounds like the author is unknown although it is usually attributed to Alexander Tytler.
"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."
I guess I'm not as fatalistic about our future as this quote suggests I should be, but I do think it is a real tendency and conflicts with my capitalist views expressed above. Of course, if we vote ourselves largesse from the public treasury, that requires higher taxes on the wealthy minority who get outvoted. Surprise, surprise; it is often that wealthy minority who are the innovators, creators, and risk takers in our society.
It occurs to me that the most powerful offsetting force is the desire of most people to have the possibility of becoming very successful and wealthy. A socialist should never allow the lottery because it exposes our willingness to sacrifice current benefits for the chance at great wealth. In the same way, I think many of us prefer less assistance from our government in return for getting to keep more of our gains if we manage to generate great wealth.
Finally, and I hate to even bring this up, but I am not opposed to the estate tax because I think it encourages the successful to use their wealth in their lifetime, which is good for the broader standard of living, and because I do not think a massive inheritance encourages innovation, creativity and risk-taking. I've gone back and forth on this issue over the years, but this is were I stand now.
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