Evercore ( NYSE: EVR ) stock has dropped 6.2% and Moelis & Co. ( NYSE: MC ) stock has slid 6.9% in Friday midday trading after UBS analyst Brennan Hawken downgraded the investment bank advisory firms to Sell from Neutral as both are likely to see fixed compensation expense ratio rise while M&A activity stays sluggish.
On Evercore ( EVR ): "Negative operating leverage is likely to persist given that EVR's public revenue is down 40% Y/Y, compared to a 29% average decline across the boutiques," Hawken wrote in a note to clients."
And while the company has invested in diversifying away from core M&A, its revenue is still heavily weighted toward advisory fees (80% of total revenue), he said.
Hawken sees fixed compensation adding considerable "upward pressure to the company's adjusted comp ratio," as he forecasts 65% in H2 2022 vs. 59% in H1 2022. "Moreover, MC's revenue picture continues to deteriorate as the public revenue pipeline is down >50% Y/Y, and the pace of replenishment remains sluggish."
Note that earlier in the week, SA's Quant rating flagged Moelis ( MC ) for a high risk of performing poorly. The SA Quant rating has been flashing red for Evercore ( EVR ) since April.
Hawken's Sell rating on Evercore ( EVR ) contrasts with the average Wall Street rating of Buy . Meanwhile, the average Wall Street rating for Moelis ( MC ) stands at Hold.
SA contributor Sweet Minute Capital is strongly bullish on both Evercore ( EVR ), citing strong financial results in good times and bad, and Moelis ( MC ), as restructuring activity offsets the M&A slump
For further details see:
Evercore, Moelis stock slump after UBS downgrades to Sell amid M&A slump