Houlihan Lockey purchase ahead of quarterly report

4月24日

Key arguments supporting the idea

- Investment banking activity resurgence powers big banks.
- A wave of surprisingly good earnings reports may take the shareholders
on a ride.
- Technical support highlights positive risk balance.

Investment thesis

Houlihan Lokey, Inc. (NYSE: HLI) is a global investment bank with expertise in
mergers and acquisitions, capital markets, financial restructuring, and financial and
valuation advisory. Houlihan Lokey was founded in 1972 in California and since
then gained the position of the No. 1 investment bank for all global M&A
transactions.

The stock's correction amid the general market drawdown could mean a
favorable entry point. The stock is trading 7% below the local high, with a
moderate pullback ahead of the quarterly report seeming reasonable given that
consensus suggests strong net income growth. The company will report results on
Wednesday, May 8. The RSI is showing signs of the stock being overbought as it
moves out of the zone below 40 points.

The results of all major banks were generally positive. Goldman Sachs (GS) EPS
rose 31.7% YoY, better than expected, and Morgan Stanley's earnings rose 18% YoY,
also better than expected. Although Bank of America (BAC) earnings fell 18%, the
bank's CEO Brian Moynihan accompanied the report with positive commentary
and an optimistic outlook. Citibank reported 35% increase in revenue from the
banking segment (corporate and investment banking). JP Morgan reported a 21%
growth in YoY fees from IB, and Wells Fargo increased IB revenues two-fold. These
peer group dynamics could mean that Hoolihan Lockey could post similar (or
better) results.

EY confirms growing issuer activity. There is momentum for private equity (PE)
IPOs in 2024, with average deal size in the first quarter of 2024 up 26% from 2023.
CEOs of major banks in the US reported strong inflows from investment banking
activity. Financials Sector (XLF) consolidated NTM EPS has been constantly revised
throughout 2023 and 2024, reaching $2.7 per share (+7% YoY). The consensus
forecast also indicates expectations of 20% EPS growth for the company, strongly
above comparable peers. The high growth rate fully explains the company's high
comparable valuations.

A higher appeal for capital market in 2024 may drive up the revenues of
investment banks. Morgan Stanley CEO said 'existential' need for M&A will revive
IB. As the year progresses rising oil prices are supposed to bring the attention of
the O&G players to new equity raising. Moreover, after two years of heightened
interest rates, the companies should revive their strategies, which opens the door
for a new wave of M&A and IPO activity. M&A fees could rebound in 2024, with
fundamental support in corporate cash and private equity dry powder giving us
confidence in the growth potential, which will likely help adjacent financing fees