Evercore Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Evercore Inc. is a premier independent investment banking advisory firm, offering services in strategic advisory, capital markets, and private funds advisory, primarily to companies, institutional investors and sponsors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Evercore’s business revolves around the complex financial landscape, so while the company has some distinguishing qualities, its moat is less robust than a firm with a easily scalable and replicable advantage. Moat Analysis: 2/5

Evercore possesses a relatively narrow economic moat, stemming primarily from its reputation and expertise, and client switching costs in its advisory businesses. Let’s break down the rating:

Reputation and Expertise: Evercore has built a strong reputation for providing strategic advice on complex transactions. It employs highly specialized bankers, and the quality of their advice is a key factor in attracting and retaining clients. However, such specialized expertise and the ability to execute complex transactions are also readily available at competitors. This is not a barrier that cannot be circumvented with effort.

Switching Costs: Once a client engages Evercore, they develop an understanding of the company’s business and its unique needs. That information and understanding might get lost when the client chooses to move to another firm. However, these switching costs aren’t high enough to qualify for a wide moat, this is because it is a single service for which the information has to be learned again, and it is only a barrier in the initial transition. However, this isn’t a persistent advantage.
Limited Scale Advantages: Unlike larger, integrated banks, Evercore’s independence prevents it from offering services across the entire spectrum of finance. While focusing on advisory businesses can lead to better results for them in particular fields, they aren’t fully scalable as the firm’s revenues are linked to its people. Other firms, while offering different products, can spread the infrastructure costs across different parts of their business.
Lack of Network Effects: While a strong network is useful in the investment banking industry, it’s not as crucial as in other industries such as credit cards or telecom providers. The main source of moat isn’t a network, but is rather a relationship between people.

Moat Risks and Business Resilience

Despite the above average returns, there are several notable risks that could hurt the moat and profitability of EVR in the near future.

Increased Competition: The financial services sector is always a competitive environment. New boutiques firms and global bulge bracket banks have also invested heavily to boost their expertise in the areas of expertise that EVR offers. Increased competition can lead to pressure on fees and margins. This makes the moat of EVR less durable than it appears.
Economic Downturns: The business of investment banking is tied closely to economic conditions. During recessions and other slowdowns in the economy, there are likely to be fewer M&A and other deals, which directly impacts the business. The volatility of revenue makes earnings less reliable.
Talent Retention: Evercore’s success depends heavily on retaining and attracting the best talent, but such talent is always in high demand. Any difficulty in attracting and retaining talent can hurt its long-term profitability.
Regulation: Tighter regulations or changes to the regulatory environment could impact the business or force changes in certain business models used in the industry.
Loss of Key Clients: The firm’s business model is to establish key relationships that would ideally bring recurring fees and income. Losing a key client or a number of large clients could hurt the firm’s income.
Reputational Risk: Investment banks’ reputations can make or break them. Any significant error or malpractice could cause long lasting financial and reputational damage to the firm.
Market Sentiment: The share price is not always tied to the value of the company. During market volatility, even a slight change in the market sentiment can make its stock go down irrespective of the long term potential and profitability.

While all of the above risks have a chance of materializing, EVR has shown to be resilient to them historically. For example, while trading volume and fees decrease in market downturns, investment banking revenues usually do very well in those times. EVR has shown to be a good operator with great execution, thus making it a good position to have in your portfolio, but with an acknowledgement that its competitive advantage or moat is less strong compared to some other companies.

Business Overview

Evercore operates across three main segments:

Investment Banking and Equities: This segment provides strategic advisory and capital markets services including M&A advisory, restructuring advice, and raising capital (both debt and equity) to companies, institutional investors and sponsors. In 2021, fees related to investment banking and equities made up 89.9% of the total revenue.
Investment Management: This segment provides investment management solutions to wealthy individuals and institutional investors. In 2021, fees from investment management accounted for 10.1% of the total revenue.
Wealth Management: Wealth management provides financial planning and investment management services to individuals, families, and related entities. The company intends to use new hires and acquisitions to bolster the growth. Wealth management did not generate any revenue in 2021.

EVR is focusing on its advisory businesses that bring in high margin fees, and it has been less dependent on interest rates.

The company operates in the highly competitive financial sector and thus is a high volume low margin business, especially in its equity and debt underwriting activities.

Financial Deep Dive

The key takeaway is that while the revenues for EVR are tied to the market, the management is doing its best to boost the stability of the company, by expanding its advisory and wealth management segments. This means that the future performance of the company is less dependent on the state of the economy. Here is an analysis of the company’s latest financial health from its 2022 10-K report, 10-Q report and Earnings Calls.

Profitability and Revenues:

Evercore’s revenues are tied directly to the activity in the mergers and acquisition markets and financial markets. The revenue was quite volatile over the past few years, mainly due to macro issues.
Investment banking is a high-margin business, and the company has also been focusing more on this side of the business, which is less capital intensive than underwriting and trading.
In 2022, Evercore’s total revenue was $2.67 billion, a 13.7% increase from $2.35 billion in 2021.
For the nine months ended September 30, 2023: EVR total revenue was $1.79B a 1.2% increase when compared to $1.77B for the same period in 2022.
Net revenues from Investment Banking and Equities were up 17.5% YoY in the latest 10-Q
Net revenues from Wealth Management were up 32.2% YoY in the latest 10-Q. However, this segment is still small, so the impact of the revenue isn’t felt as much.
In the past few years, the firm has shown tremendous growth.
Expenses have also increased with it, mainly due to more compensation.
EVR’s adjusted operating margin is consistently over 25%.

Balance Sheet Analysis: 4/5

The balance sheet is quite robust and healthy with more assets than liabilities. However, the debt is high compared to competitors but they should be able to use their strong cash flows to tackle this.

Cash, cash equivalents, and restricted cash totaled $1.07 billion as of 31 Dec 2022, down from 1.64B at 2021 year end. However, such is normal with many companies in the financial sector.
Total Assets of $4.49 billion and total liabilities of 2.09B as of 31 Dec 2022. There is a good safety cushion.
Total debt is at $651 million, which is slightly high but still manageable. Debt to Equity of 0.32.
The company has high liquidity and ability to quickly transform its assets into cash.

Understanding the Business: 3/5

EVR operates in the competitive investment banking industry, and there are many things that go on behind the scenes in the company and its financial reports, and many things depend on the state of the market and the economy.

The business of EVR is quite complex and it’s difficult to understand every aspect of the business, especially for people outside of the financial world. It involves many different services with different nuances.
Although some services can be understood without a lot of difficulty, other parts of the business, such as derivative trading or complex M&A deals are very complex and difficult to understand.
EVR’s financial reports are also quite complicated and require significant financial knowledge to properly dissect them.
The performance of EVR depends on multiple factors that can be difficult to predict, such as the state of the market or how fast the economy is growing, making the business harder to understand.
While a general overview of the company is doable for the average investor, to fully and deeply understand each part of the business and its financial structure requires significant effort and expertise.

Recent Concerns and Management Response

Recent changes in the market have hurt the short term revenues, however, management is confident in its longer term strategy and the actions taken by management to address these issues.

In the latest earnings call, it was mentioned that the advisory business has performed well but the underwriting business has fallen due to poor market conditions.
The management has indicated that despite the slowing revenues, that they expect earnings to bounce back with an improving market outlook.
While there were some concerns around the company’s share price and a slowdown in hiring, the company has reaffirmed their confidence in the company’s potential.

In conclusion, Evercore is a premier advisory firm, with a narrow economic moat supported by strong relationships and specialized expertise. The company is focused on value creation, long term strategy and is expanding its market to achieve it. While there are several inherent risks for the company, they can be mitigated with a prudent investment strategy.