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Evercore: Great Company, Bad Time To Buy

Introduction

Evercore (NYSE:EVR) made it into one of our screeners recently. We have become particularly interested in investment firms during the past few months and decided that it would be well worth our time to analyze Evercore and share the results with you.

Analyzing investment firms is always a pleasure, because their PowerPoint presentations always cover large amounts of the information we are looking for. The investment firms that have dividend policies are often run by management teams which have a solid understanding of what income-oriented investors are searching. Finally, the business model is highly profitable for firms which are successful in maintaining deal flow and growing assets under management.

Evercore is no exception. The stock has a dividend yield of 3.11% and trades around $74.63. Based on my M.A.D. Assessment, EVR has a Dividend Strength score of 99 and a Stock Strength score of 79. Evercore ticks all the boxes but one: market sentiment is decidedly against it.

This article will present and discuss the factors which prove that, while EVR is a stock I'd like to have in my portfolio, I won't buy until investor sentiment reverses.


In the last quarter of 2019, Robert covered a small handful of investment firms:

  • Hennessy Advisors (NASDAQ:HNNA), which he shied away from. The stock has decreased 6% since his article.
  • Diamond Hill (NASDAQ:DHIL), which he initiated a position in for the juicy dividend.
  • Lazard (NYSE:LAZ) which he suggested would be a great buy. The stock is up 6.7% in just over 6 weeks.

For those of you who are unfamiliar with Evercore, the company operates through two segments: investment banking and investment management.

I will first analyze the company's dividend profile, before considering its potential for capital appreciation from current levels.

Dividend Strength

As dividend investors, we are seeking to consistently grow the income generated by our portfolios. To do this, we invest in high-quality dividend stocks, which we call "strong dividend stocks". A strong dividend stock is first and foremost a safe dividend stock. There is nothing worse than seeing a stock slash its dividend, especially if you were counting on that income. But the dividend needs to be significant; it needs potential. This doesn't necessarily mean that it needs to have a high yield, but lower yielding dividend stocks need to make up for the lack of yield by high dividend growth potential. Both dividend safety and dividend strength are essential when it comes to successfully investing for income.

Dividend Safety

27% of Evercore's earnings are paid out as dividends. This is a more attractive payout ratio than 70% of dividend stocks.

EVR pays 15% of its operating cash flow as a dividend, putting it ahead of 74% of dividend stocks.

17% of Evercore's free cash flow is paid out as dividends, putting it ahead of 82% of dividend stocks.


Evercore's payout ratios are super low and have been low for a long while. The company has more than doubled the amount of free cash flow per share it has generated over the past 5 years. The dividend has doubled, showing that the amount of cash returned to shareholders has grown with growth in the underlying operations. The company only spends about $1-2 per share in CAPEX, leaving enough free cash flow to pay for the dividend 5 times over.

EVR can pay its interest 27 times, which is better than 90% of stocks. This level of coverage can be considered top of class.

There is no reason anyone would want to worry about Evercore's dividend. It is as solid as they come. It is rare to see these levels of coverage in a firm yielding over 3%.

Dividend Potential

Evercore's dividend yield of 3.11% is higher than 64% of dividend stocks.

This last year, the dividend grew 20%, which is above their 5-year CAGR of 17%.


Evercore's dividend growth has been stellar. From a firm which yields 3%, we would expect dividend growth of about 8-12%, but Evercore has been growing its dividend at double the rate. In 10 years, the dividend has grown by a factor of 5x. Given the extremely low payout ratios, there are no reasons to believe that Evercore's dividend growth would slow in the upcoming years.

What's more, Evercore's revenue growth has been backed up by growth in fundamentals. Over the previous 3 years, Evercore has seen its revenues grow at a 15% CAGR and net income at a 61% CAGR.


If the company can continue to grow its revenue and net income at the current rate, EVR's dividend has great potential for growth. Yet investors didn't fancy the third quarter report, which sent the stock spiraling downwards. While EPS per share grew YoY, market participants were disappointed with the 3rd quarter results, which came in at $1.26, significantly below analyst estimates of $1.63. Softer advisory fees were the main culprit.

Let's be clear. Investment banking revenues are cyclical, but even with softer revenues, EVR grew its per share numbers. The dividend has so much room to run, that even flat revenues and flat earnings for 2 to 3 years shouldn't prevent the firm from generously increasing the quarterly dividend.

Dividend Summary

The combination of the data presented above gives EVR a dividend strength score of 99/100. The dividend is super safe, has increased every year since 2009 at a very attractive rate, way above what you'd expect from a stock yielding 3%. As an income-producing vehicle, EVR has everything you'd look for and more.

Stock Strength

But what can investors expect in terms of capital appreciation? The stock has struggled during the past twelve months, worrying many investors. As you'll see, the lack of investor approval is what is preventing me from initiating a position. To determine a stock's likelihood of beating the market in the upcoming twelve months, I look at four factors: value, momentum, financial strength, and earnings quality. We have algorithms which calculate 60,000 odd ratios each day to rank all stocks across these 4 factors. This determines our stock strength score. We tend to stay away from all stocks which have appalling scores in either of these categories.

Value

  • EVR has a P/E of 9.28x
  • P/S of 1.49x
  • P/CFO of 5.07x
  • Dividend yield of 3.11%
  • Buyback yield of 6.69%
  • Shareholder yield of 9.8%.

These values would suggest that EVR is more undervalued than 97% of stocks, which is very encouraging. Relative to earnings and cash, Evercore is dirt cheap.


The chart above suggests that EVR is trading way below its 5-year average PE. The stock has historically traded at quite rich valuations, between 25 and 30x earnings. This changed in August 2018, when the stock lost all steam. It spent all of 2019 at very low valuations and is still lingering there.

But boy does EVR look cheap. Its 3% dividend yield is supplemented by a large 6% buyback yield. The large shareholder yield and low multiples make EVR look like a bargain. But is that good enough?

Value Score: 97/100

Momentum

Evercore's price has increased 0.46% these last 3 months, but has decreased -17.37% these last 6 months and -10.77% these last 12 months and, now, currently sits at $74.63.


EVR has better momentum than only 22% of stocks, which is appalling. The stock has failed to catch a break as market participants are expecting softer M&A activity in upcoming periods. Evercore's business has grown, but investor sentiment has pretty much vanished.



Evercore has been locked below its 50-day SMA since May 2019. Each time the price challenged this level, it then went lower. This is particularly bearish, as the market has never managed to gain the levels of confidence required to push beyond these levels.

This will be the main metric we will be tracking to identify a turnaround in Evercore's momentum. If the price can go through its 50-day SMA and stay above it for a while, we might see a reversal in the current trend. Otherwise, the stock looks on track to stay locked between $75 and $80 for a while.

The bad momentum is reason enough to stay away from the stock. Stocks in the worst quartile for momentum tend to significantly underperform the broad market over the next few quarters.

Momentum score: 22/100

Financial Strength

EVR's gearing ratio of 1.6 is better than 47% of stocks. Evercore's liabilities have increased by 50% this last year. Operating cash flow can cover 52.2% of EVR's liabilities. These ratios would suggest that Evercore has better financial strength than 66% of stocks. Half of the large increase in liabilities is due to new accounting standards which force the company to recognize operating leases. The remaining increase is due to the emission of new notes, yet total liabilities still remain insignificant relative to the amount of cash flow the firm generates. EVR's financial strength is well above that of the median US stock.

Financial Strength Score: 66/100

Earnings Quality

Evercore's Total Accruals to Assets ratio of -29.5% puts it ahead of 88% of stocks. 44.3% of EVR's capital expenditure is depreciated each year, which is better than 15% of stocks. Each dollar of EVR's assets generates $1.0 of revenue, putting it ahead of 74% of stocks. This makes EVR's earnings quality better than 71% of stocks.

Earnings Quality Score: 71/100

Stock Strength Summary

When combining the different factors of the stock's profile, we get a stock strength score of 79/100, which is encouraging. The firm's fundamentals are of high quality, the price looks extremely cheap, but the firm's momentum is appalling. Given that EVR would still be cheap anywhere between its current price and $100, I'm more than happy to wait for investor sentiment to turn around. Otherwise, investors could be facing a lot of frustration and even potentially see lower prices while we wait for a shift in momentum.

Conclusion

With a Dividend Strength score of 99 and a Stock Strength of 79, Evercore is a good choice for dividend investors, but the timing isn't right. Investors should place the stock on their watchlists and wait for the momentum to change.

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