GHL - Greenhill Saw That Q4 Pop But Optimism Maybe Premature
Summary
- Management really leaned into the notion that 2023 would be a strong rebound year. We think that things will be less vigorous than hoped.
- Management was accurate with their assertions in Q3 that Q4 would be a stronger quarter with deals shifting right, and that continues and operating leverage continues to be evident.
- Industrial and telco are still good M&A markets, and strength in industrial M&A should be considered a leading indicator for the economy.
- Greenhill works with corporates, but resolutions in the private debt markets may mean sponsors are a more attractive area this year where corporates could be disappointed with rates.
- Comparing them to PWP, Greenhill seems the better deal, but we're not overweight the advisor bucket anymore.
Greenhill ( GHL ) is a pretty well respected advisory house and a plucky stock which has managed to stay relatively resilient among its peers. It was resilient even with the 'red-shift' in deal cycles that sees elongated decision making and slower booking, which put major wins into Q4 as described by management in Q3. We've seen it happen now, and the company has impressed with about 33% sequential net income growth. Things look good for Greenhill, but we don't like how much management is leaning into the positives of 2023, because we still think there are risks and it may not be the rebound year they hope for. Overall, with the run-up since our last article, we are no longer overweight this sector.
Q4 Notes
Firstly, we are finally seeing signs of the 'months' of dialogue related to restructuring finally coming to pass. Not super distressed opportunities, but stuff that should finally be a tailwind to peers like PJT Partners ( PJT ).
I would say, toward the end of the year, we started seeing a significant pickup in opportunities. I would say that most of the activity is in what I would call like classic restructuring like companies that are in some degree of distress, not necessarily Chapter 11 style but some degree of distress.
Moreover, management reports on continued struggles in credit markets making some restructuring activity difficult. It also explains continued pressure on sponsor business, which remains very depressed. Still, there should be some rebound here, even if it's only partial, because the LevFin problems were being caused by a shutdown in the secondary market at the worst of the rate-related volatility.
Yes. Look, I think financing markets, I do expect, frankly, that they will continue to improve. But I mean they've got a long way to go to get back to being kind of available for everybody. So I think credit markets will be discerning, what I would call discerning for a good while.
Scott Bok, CEO of GHL
The company mentioned that its current business is pretty corporate focused. Its idiosyncratic and corporate focused business is much of the reason why Greenhill managed to avoid extreme downturns in their deal activity. For 2023 they are already guiding vaguely to some kind of rebound year. While we saw deal activity shift from Q3 to Q4 leading to a sequential 33% jump in net income, and this red-shift should support upcoming quarters too, we think optimism is still premature given macroeconomic factors.
Look, I'd also say that, whereas a year ago, I think everybody was incredibly optimistic, right? That was before the Ukraine invasion and higher inflation and interest rates and all the rest. If you look at where we are now, we're kind of at probably very recently a sort of peak pessimism in some senses in the market. But clearly, rates are now starting to come down on the long end, inflation starting to come down.
Scott Bok
Bok goes on to say that they expect continued caution, but that things look clearer. We think that while there is some peaking going on, we still have some dangers. Consider some comments from FOMC members.
The longer high inflation persists, the more likely it is that households and businesses may come to expect higher inflation in the longer term.
The issue is that inflation must not only be dealt with certainly but quickly too, and while supply side pressure with a deflated commodity environment have helped, other parts of the economy like shelter are a continuing problem. Also not all supply side issues are done with, considering continued food inflation. Bowman may be a more hawkish member, but keep in mind that it's not over till it's over.
Greenhill is planning on making 2023 into a more intensive hiring year. This may be a mistake. While headcount can be quickly adjusted in the industry, it is not without cost and better avoided. Hiring at what is still a pretty low point though is how these companies win on compensation and invest in their only asset quite cheaply, but it still may be slightly premature, especially as interest expenses are not insignificant and the operating leverage would rise further with more headcount.
Bottom Line
The company has gone up 33% since we last covered it, which is why we're being more cautious now. There's still a lot going for Greenhill, and the US economy is faring much better than expected.
Industrial M&A is apparently a strong point in Q4, and this is a very important leading indicator for the US economy. The industrial production index was worse than forecast but not negative, and ultimately industrial M&A and investment leads the cycle of industrial production, so we take this signal with optimism for the most operationally levered part of the US economy; usually the most cautious part too.
Moreover, the company has a strong reputation and has shown it can win share in terrible markets. It is also profitable, and trades way below peers with stronger restructuring franchises, and also below peers that have a more similar business mix to them like Perella Weinberg ( PWP ), whose multiple is 14x forward PE to GHL's 9x.
Still, we are not betting on this sector because we think it may be overcome with a premature excitement on the macro outlook.
For further details see:
Greenhill Saw That Q4 Pop, But Optimism Maybe Premature