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Bear of the Day: Greenhill & Co (GHL)

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Greenhill & Co (GHL - Free Report) , a Zacks Rank #5 (Strong Sell), is a leading independent investment bank that provides financial advice on significant mergers, acquisitions and restructurings; assists private funds in raising capital from investors; and manages merchant banking funds. It acts for clients located throughout the world from its offices in New York, London, Frankfurt, Toronto, Dallas and San Francisco.

Recent Earnings

Due to weakness in the M&A market, and a decline in total deal announcements GHL missed the Zacks consensus earnings estimate for Q2 17.  Specifically, total global deal volumes were down -12% even when compared to a soft market last year.  Initial expectations were that deal volumes would pick up in the second half of 2017, but this optimism has been pushed back until the first half of 2018.

GHL saw total quarterly revenues fall by -26%, and total year to date revenues decline by -21%.  Management stated that quarterly revenues were down due to “fewer large transaction completion fees, and that the fall in year to date revenues were due to reduced merger and acquisition revenues outside of the U.S.

Management’s Take

According to Robert F. Greenhill, Chairman, “While our level of engagement with clients globally has remained high, and we have seen a meaningful increase in year to date revenue from U.S. clients, our pace of deal announcements globally has been slower than expected, resulting in reduced total revenue, higher cost ratios and lower profitability. Our results are, in part, a function of softness in the M&A market, where global deal volume is currently on pace to be down 12% compared to last year, even though last year itself was a relatively quiet year in which the global advisory fee pool declined slightly. A second contributing factor to our results is our historic mix of business, with a heavy international component, a focus on larger transactions and a smaller focus on restructuring than our closest peers. Firms more weighted toward the domestic market, smaller M&A transactions and restructuring have done better in the recent environment, though we remain confident that our strategy leads to strong profitability and cash flow over the course of cycles. Lastly, our results are a function of a transaction-oriented business where transaction timing is out of our control, such that last year we hugely outperformed our competitors with a 29% increase in advisory revenue, and this year we have essentially seen a reversal of part of that relative gain.”

Price and Earnings Consensus Graph

As you can see in the graph below, both earnings and future earnings estimates have been falling for the majority of 2017.

Greenhill & Co., Inc. Price and Consensus

Greenhill & Co., Inc. Price and Consensus | Greenhill & Co., Inc. Quote

Declining Earnings Estimates

Due to the decline in total deals, and subsequent downturn in revenues, earnings estimates for Q3 17, Q4 17, FY 17, and FY 18 have all seen negative revisions; Q3 17 fell from $0.24 to -$0.12, Q4 dropped from $0.40 to $0.13, FY 17 plummeted from $1.43 to $0.42, and FY 18 was reduced from $1.61 to $1.13.

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