Summary
- We are seeing from a larger player now that restructuring is actually picking up, but not with disaster bankruptcies that we might have expected some years ago.
- Europe is a strong market for PWP, and the losses in revenue are all coming from the US, but we are seeing sequential improvement and the bleeding is staunched.
- The narratives remain the same, and that's the elongated cycles but building backlogs. We fully believe this and think that as certainty rises velocity, the key factor, will normalise.
- Management mentioned another interesting dynamic to remember about these sorts of business, which is the competition between corporates and sponsors, which has been a mitigant.
- Finally, the company is very confident in the low value of its stock and has doubled their already substantial buyback program for an additional 13% of market cap.
Perella Weinberg Partners ( PWP ) is one of the many advisory companies that we cover on Seeking Alpha. They are a boutique and while they had a pretty devastated beginning of the year, they are looking better now, and their European performance is commendable. They speak about restructuring picking up, and we get more information on the sponsor-corporate dynamics in the M&A space. We have every reason to believe that this space will normalise. What matters is certainty, with the low valuations in markets actually being a tailwind given corporate conditions. They are also going to buyback another 13% of shares, showing confidence in their value. It's one of the most respected brands and a very solid way to play the advisory space without going to mainstream and avoiding the pitfalls in the full-service banks' business.
FY Earnings Note
Firstly, we should notice that the rate of revenue accelerated into the Q4 on a sequential basis. While some of it might be seasonality and pushing for deals to get over the finish line for earnings, it also comes down to better market conditions.
FY revenue growth is down around 20% , consistent with peer Greenhill ( GHL ) which is a more idiosyncratic player, but the rate of revenue sequentially improved approximately 20%. Due to operating leverage in the business model, net income margins rose substantially from -6% to 3% thanks to sequential improvement and some major deal closes.
Some of the big ones this year have been in restructuring, and the discussion of 'dialogues' are finally over. While not in total disaster situations, activity is picking up on more light restructuring projects as companies reposition to become more comfortable in the current environment - things like managing maturities for mostly healthy companies. Management is clear now that this activity is actually picking up, but the growth in these more esoteric businesses are coming from things like private capital placement, and more idiosyncratic sources of revenue. Also their big restructuring deals have been in the public sector in 2022, not so much the private.
PWP apparently managed to keep their European business flat , without declining, and this is a testament to their top-tier status. The US drove declines, and this would partially be because of hard comps but it's also because the US is structurally more levered to economic conditions in its M&A activity, just because activity tends to be less conservative in the US.
They also referenced other dynamics which we've seen in PWP's peers. In particular, financial sponsor activity meaning PE firms and the like, usually referred to as just 'sponsors', is depressed due to difficult credit market conditions and trigger shy funds busy explaining their impaired values to LPs from a zealous 2021 of allocations. Corporates are completely taking over the M&A markets right now, even though financial sponsors could step in and pick up wish-list companies at better valuations nowadays - again, it's a problem of how much they can leverage nowadays. Apparently, opportunities to get credit is coming in waves, showing that a lot of the problems are coming from the primary issuers, i.e., the suppliers of credit. However, factors that lead to less demand from financial sponsors becomes an opportunity for corporates to step in, and this has been a mitigating factor for an otherwise tough year. PE will eventually have to put money somewhere too, especially with all their dry-powder.
Bottom Line
The quarter brings little surprises, but the big news is the buyback.
And finally, we acted on our commitment to return capital in total returning north of a $100 million in 2022. After announcing a $100 million share repurchase authorization in February 2022, we have deployed approximately 75% of it in under a year's time. And we announced this morning an incremental 100 million dollar authorization.
Peter Weinberg, Chairman of PWP
In other words, there is going to be a buyback of around 13% of the market cap based on the current share price, over the next year. Of course, the market cap could vary, but the 13% applies if they were to buyback all the shares today.
They started this when their price was in the pits, so it's fine that they're doing a bit of smoothing out on the way back up. Investors can imagine that they'll be buying the dip on their own stock then, and that should lend investors more confidence that a gully won't go on forever.
PWP trades in line with a company like Greenhill in terms of EV/Revenue, where PWP is aggressively scaling and taking on some costs right now making them harder to compare. Compensation has stayed higher as they're still investing in talent, and also chose to keep comps high to keep employees happy given the relatively strong PWP performance, especially in Europe.
We think there's a lot of upside in PWP. They should be closer to Moelis ( MC ) in some of these multiples. They're below them on the forward PE basis, and they are certainly below them on P/S and EV/Revenue metrics by a factor of 5. The reputation is strong, and the performance continues to improve. Buyback gives extra leverage given that we think certainty will bring those velocities up, and help liquidate backlogs faster and faster as we move further into 2023. It's a solid pick, we like it better than Moelis right now.
For further details see:
Perella Weinberg Is Doubling The Buyback Program