PIPR - Piper Sandler: Unexpected Banking Weakness

2023-09-11 14:51:21 ET

Summary

• Piper Sandler's advisory business did not grow sequentially, and market jitters in credit have affected the brokerage business so far.
• The healthcare sector is performing decently, but exposure to earlier stage healthcare companies is impacting PIPR's business as they dial down outlays.
• While there are some positive signs in the M&A and capital financing markets, the relative value of Piper Sandler compared to peers is questionable.
• We think there are other players that are demonstrating better recovery dynamics for cheaper.

Piper Sandler ( PIPR ) has quite a bit of exposure to the middle market in financial services. We thought distress in that market segment might have been helpful for PIPR to kick-start activity from already highly depressed levels, but it was not the case. Advisory didn't grow sequentially as we've been seeing with some other shops. On top of that, market jitters in credit but not in equities have been lessening the contribution from the brokerage business. However, there are green shoots in the M&A and capital financing markets which will help PIPR, but we don't see the relative value in PIPR when looking at peer performance.

Q2 Breakdown

The key points to note are that PIPR has about half of its advisory exposure in healthcare. It's not a bad place to be, but it's not great either because by virtue of being middle-market, this also means a lot of exposure to earlier stage healthcare companies which are not performing terribly well, and are reducing the pace of their capital outlays altogether.

Healthcare has been improving sequentially despite some challenges, the issue is that other than healthcare PIPR has quite a lot of exposure to the financial services middle market, which includes regional banks. We thought that troubles in regional banks could be an angle for PIPR, since it's an idiosyncratic moment for that segment and PIPR was involved in advising FDIC in the SVB case. Instead, financial services exposures were a negative in terms of sequential performance.

PIPR saw flat sequential developments comprehensively, not as good as some other peers, although PIPR has a bit of peculiar business mix.

Still, much of what makes PIPR unique compared to other smaller shops is their brokerage business. This has not done great sequentially because equity brokerage is countercyclical to equity markets while credit brokerage is more pro-cyclical. Since equity markets rallied, the equity brokerage bastion is crumbling a bit, while credit players are still on the sidelines.

While equity should continue to eke down, we think credit is due for a recovery in the next quarters considering soft-landing speculation after the June 2023 quarter close.

Moreover, corporate financing was up on a sequential basis. ECM and DCM was pretty doomed for a while, but there was some slight IPO activity and now with large profile IPOs coming back to market in tech, that may be a signal that corporates are getting real about valuations and are coming back to adjust financial structures in the face of a new rate environment.

Bottom Line

Advisory should see some improvement, although the dynamics with regional banking demonstrate that recovery for PIPR may be slower than peers. Brokerage business will likely stay relatively solid at current activity levels as equity donates to credit in terms of business. Corporate financing has been so depressed that it can only go up.

PIPR doesn't have very useful comps comprehensively. You'd have to break it down by business line, but from a trader's perspective it doesn't look like there's too much relative value. While Lazard ( LAZ ) has AM instead of brokerage, it's been more languid despite a pretty vigorous showing in advisory. AM is also more reliable than brokerage is. LAZ yields much better too in terms of dividends, and it's cheaper. We'd rather take them over PIPR.

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