OPY - Oppenheimer: Higher Rates Save Growth Buyback Activity

2023-11-28 13:33:23 ET

Summary

• Oppenheimer Holdings Inc. is a private client financial advisory with a sales and trading business and mid-market investment bank.
• The company has shown resilience during tough market cycles and has potential downside protection thanks to mid-market positioning and countercyclical revenue sources.
• The buyback of shares and potential for a higher dividend in the future make Oppenheimer Holdings an interesting investment opportunity.

Oppenheimer Holdings Inc. ( OPY ) is mainly a private client financial advisory, but also has a sales and trading business as well as a mid-market investment bank. In general, we actually think that considering some resilient streaks in the business over this tough cycle, while also having further downside protection if markets go down again, and being levered to an eventual recovery, the multiple looks quite low, which we can quite conservatively annualize it at around 10x. Most of the payout is in buybacks, which we think is appropriate currently, and longer term that could open up for a higher dividend as the burden will be lower with fewer shares outstanding.

Earnings Notes

We note improvements in capital markets on a YoY basis, rare among advisory stocks, and general resilience in investment banking, or IB, which is typical in mid-market currently. Capital markets have been exceptionally weak with large-ticket advisory franchises, but the need to eventually raise capital, even if in unfavorable conditions, has likely helped OPY as smaller corporates are still active in the M&A space and are maintaining a certain capital intensity. Advisory fees from IB have suffered more which is unexpected, but the overall performance in IB is in line with the resilience that we've been observing over the latest cycle in mid-market advisory.

Gains in the general market are adding to the advisory fees associated with private clients and assets under management are growing, and the associated decreases in liquidity are creating modest pressure on the revenues that can be generated by the sales and trading businesses.

Interest income has also been a major help. Even if it is quite a small proportion of revenue, the sheer increase in rates has meant growth that's more solid ahead the typical operating segments.

We also note the buybacks of 437k shares, which approximately equates to around a 4% buyback yield. OPY's lagging stock price performance and overall resilience and valuation make us pretty happy with the buyback, which we think is fundamentally value-additive.

Bottom Line

Oppenheimer Holdings' annualized EPS is above $4 per share, so the P/E is around 10x. The logic of annualizing is that there is a certain amount of downside protection, and while this year's post-Thanksgiving dealmaking is underwhelming , protection provided by the S&T business as well as general resilience in AUM for a broad-based PCG player like OPY should balance out to an average performance over the next three quarters similar to this Q3.

10x is not very high. While there are still better deals on the market, it shouldn't be a bad entry point, either, for investors or the company itself, which is buying back shares. Buybacks were done last year as well, with more than 10% of share bought back between 2021 and 2022. In the future, we think that continued buybacks at these current prices will nicely reduce the dividend burden for remaining Oppenheimer Holdings Inc. outstanding shares, and there could be scope for a more generous dividend in the future which would be more in line with what you'd expect from a primarily AM business, which usually have decent yields. On valuation and the potential income proposition, with current comprehensive shareholder payout yields looking good, make Oppenheimer Holdings Inc. somewhat interesting.

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