An equities research analyst is bullish about Moelis & Co.’s prospects going forward, and not just because of its earnings results, but also due to the bank’s “strong and consistent headcount growth.”
James Mitchell, director of equity research at Buckingham Research Group, reiterated his buy recommendation for the elite boutique, calling it “a great SMID-cap growth story” – its 12% advisory fee growth last year was among the best in the group.
Mitchell believes that Moelis’s momentum is accelerating, citing “strong headcount growth, a rapidly improving fee pipeline, and increasing synergies as its global network matures, leading to higher-profile and more complex advisory assignments, which generate higher fees.”
The analyst liked what heard on the most recent Moelis earnings call. Management noted that tax reform, global synchronous growth and technology disruption are “likely to drive an elongated M&A cycle.” That’s good news for Moelis, since more than 80% of its revenue is generated by its strategic advisory business, so an improving M&A environment would give the bank a boost.
Mitchell then went into more detail about the reasons for his bullish opinion of Moelis.
Moelis added 16 new MDs last year and grew total banker headcount by 15%. This is consistent with management's goal of driving 10%-15% headcount growth per year.
Despite the capacity growth, Moelis executives noted that its bankers are working “flat out,” which Mitchell considers “a positive indicator for future revenues.” He expects similar growth in 2018, keeping revenue momentum going over the next few years.
Even after making the expenditures for the ongoing hiring push, Moelis executives say they will keep the bank’s compensation ratio flat at 58%. In other words, it expects to allow the benefit from tax reform to flow to the bottom line given a commitment to returning all excess cash flow to shareholders. It hiked its dividends, but it still has a reputation for paying well.
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