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2 Investment Banks to Buy Despite Grim Industry Prospects
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A challenging operating backdrop will keep hurting the Zacks Investment Bank industry amid soft industry-wide corporate debt and equity issuances and deal-making activities. Hence, these are expected to adversely impact top-line growth.
Nevertheless, heightened client activity in the trading business is expected to continue as the uncertainty-induced volatility is likely to persist in the near term. While costs related to technological upgrades might impede bottom-line growth, these will eventually lead to improved operating efficiency. These factors will aid industry players like Evercore Inc. (EVR - Free Report) and Piper Sandler Companies (PIPR - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary market offerings, brokerage and mergers and acquisitions (M&As). Gradually the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (comprising M&As, advisory services and securities underwriting), asset management and trading and principal investments (consisting of proprietary and brokerage trading).
3 Major Themes Shaping the Future of the Investment Bank Industry
Slowdown in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost come to a grinding halt since the start of 2022. The primary reasons for the blow to investment banking (IB) activities are the ongoing Ukraine-Russia conflict, global supply-chain disruptions, significant monetary policy tightening worldwide to control raging inflation and the expectations of a slowdown/recession. These tough market conditions are leading to a plunge in stock prices and slowing global economic growth, thereby hurting debt and equity issuances. While the deal pipeline looks healthy, there has been a substantial decline in M&A activity and volumes. Thus, subdued underwriting and advisory businesses are expected to keep hurting industry players’ revenue growth in 2023.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since the beginning of 2022, market volatility has significantly increased on several geopolitical and macroeconomic concerns. Before that, the investment banking industry had witnessed a similar level of volatility from March 2020 up to the first couple of months of 2021 due to the pandemic-induced uncertainty. The current prevalent situation is likely to persist this year as markets are still grappling with looming recession expectations, the Federal Reserve’s aggressive monetary policy and other geopolitical matters. Hence, trading volumes will continue to rise, driven by huge client activities in both equity and fixed-income businesses, thereby boosting trading income.
Technological Upgrades to Improve Operating Efficiency: Innovative trading platforms and investments in technology and advertising are likely to bolster the operations of investment banks. The industry players are emphasizing attracting and retaining the best talent for building a leadership team and spending on technology to support clients with infrastructure development and new platforms. While investment banks are likely to face increasing technology-related expenses in the near term, these initiatives are expected to result in improved operating efficiency over time.
Zacks Industry Rank Indicates a Gloomy Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #179, which places it in the bottom 28% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised lower by 14.9%.
Before we present a few stocks that you may want to consider despite industry-wide headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While stocks in the industry have collectively declined 12.1%, the S&P 500 composite has declined 12.4% and the Zacks Finance sector has fallen 16.2%.
One-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing investment banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.48X, above the median level of 2.66X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. However, the industry is trading at a huge discount when compared with the market at large as the trailing 12-month P/TBV ratio for the S&P 500 is 10X and the median level is 9.92X.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. However, a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.32X and the median level of 3.91X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
2 Investment Banks to Bet on
Evercore: This Zacks Rank #2 (Buy) company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2019 due to lower advisory fees, the same witnessed a CAGR of 10.1% over the last five years (ended 2022). Despite several near-term headwinds, the company’s strong backlog and business investments will drive the IB business in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $4.3 billion. Over the past six months, shares of the company have jumped 32.6%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $10.56 over the past month.
Price and Consensus: EVR
Piper Sandler: This Zacks Rank #2 company operates as an investment bank and institutional securities firm. The company, based in Minneapolis, MN, offers investment banking and institutional sales, trading and research services. Also, PIPR provides advisory and underwriting services.
The company has been enhancing its scale and capabilities through strategic buyouts. Last year, it acquired Cornerstone Macro, Stamford Partners and DBO Partners. These have not only diversified its revenue base but also expanded its sector coverage, geographical footprints and market share.
Thus, through its scaled platform, Piper Sandler has been witnessing robust top-line growth. Over the past 10 years, net revenues recorded a CAGR of 13% (ended 2022). As the company continues to hire expectational talent and broadens industry and product coverage, further top-line growth is anticipated despite near-term industry-wide headwinds.
PIPR has a market cap of $2.4 billion. Over the past six months, shares of the company have rallied 23.7%. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $11.53 over the past 30 days.
Price and Consensus: PIPR
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2 Investment Banks to Buy Despite Grim Industry Prospects
A challenging operating backdrop will keep hurting the Zacks Investment Bank industry amid soft industry-wide corporate debt and equity issuances and deal-making activities. Hence, these are expected to adversely impact top-line growth.
Nevertheless, heightened client activity in the trading business is expected to continue as the uncertainty-induced volatility is likely to persist in the near term. While costs related to technological upgrades might impede bottom-line growth, these will eventually lead to improved operating efficiency. These factors will aid industry players like Evercore Inc. (EVR - Free Report) and Piper Sandler Companies (PIPR - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary market offerings, brokerage and mergers and acquisitions (M&As). Gradually the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (comprising M&As, advisory services and securities underwriting), asset management and trading and principal investments (consisting of proprietary and brokerage trading).
3 Major Themes Shaping the Future of the Investment Bank Industry
Slowdown in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost come to a grinding halt since the start of 2022. The primary reasons for the blow to investment banking (IB) activities are the ongoing Ukraine-Russia conflict, global supply-chain disruptions, significant monetary policy tightening worldwide to control raging inflation and the expectations of a slowdown/recession. These tough market conditions are leading to a plunge in stock prices and slowing global economic growth, thereby hurting debt and equity issuances. While the deal pipeline looks healthy, there has been a substantial decline in M&A activity and volumes. Thus, subdued underwriting and advisory businesses are expected to keep hurting industry players’ revenue growth in 2023.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since the beginning of 2022, market volatility has significantly increased on several geopolitical and macroeconomic concerns. Before that, the investment banking industry had witnessed a similar level of volatility from March 2020 up to the first couple of months of 2021 due to the pandemic-induced uncertainty. The current prevalent situation is likely to persist this year as markets are still grappling with looming recession expectations, the Federal Reserve’s aggressive monetary policy and other geopolitical matters. Hence, trading volumes will continue to rise, driven by huge client activities in both equity and fixed-income businesses, thereby boosting trading income.
Technological Upgrades to Improve Operating Efficiency: Innovative trading platforms and investments in technology and advertising are likely to bolster the operations of investment banks. The industry players are emphasizing attracting and retaining the best talent for building a leadership team and spending on technology to support clients with infrastructure development and new platforms. While investment banks are likely to face increasing technology-related expenses in the near term, these initiatives are expected to result in improved operating efficiency over time.
Zacks Industry Rank Indicates a Gloomy Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #179, which places it in the bottom 28% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised lower by 14.9%.
Before we present a few stocks that you may want to consider despite industry-wide headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While stocks in the industry have collectively declined 12.1%, the S&P 500 composite has declined 12.4% and the Zacks Finance sector has fallen 16.2%.
One-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing investment banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.48X, above the median level of 2.66X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. However, the industry is trading at a huge discount when compared with the market at large as the trailing 12-month P/TBV ratio for the S&P 500 is 10X and the median level is 9.92X.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. However, a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.32X and the median level of 3.91X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
2 Investment Banks to Bet on
Evercore: This Zacks Rank #2 (Buy) company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2019 due to lower advisory fees, the same witnessed a CAGR of 10.1% over the last five years (ended 2022). Despite several near-term headwinds, the company’s strong backlog and business investments will drive the IB business in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $4.3 billion. Over the past six months, shares of the company have jumped 32.6%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $10.56 over the past month.
Price and Consensus: EVR
Piper Sandler: This Zacks Rank #2 company operates as an investment bank and institutional securities firm. The company, based in Minneapolis, MN, offers investment banking and institutional sales, trading and research services. Also, PIPR provides advisory and underwriting services.
The company has been enhancing its scale and capabilities through strategic buyouts. Last year, it acquired Cornerstone Macro, Stamford Partners and DBO Partners. These have not only diversified its revenue base but also expanded its sector coverage, geographical footprints and market share.
Thus, through its scaled platform, Piper Sandler has been witnessing robust top-line growth. Over the past 10 years, net revenues recorded a CAGR of 13% (ended 2022). As the company continues to hire expectational talent and broadens industry and product coverage, further top-line growth is anticipated despite near-term industry-wide headwinds.
PIPR has a market cap of $2.4 billion. Over the past six months, shares of the company have rallied 23.7%. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $11.53 over the past 30 days.
Price and Consensus: PIPR
