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Goldman Sachs analyst today upgraded his sector rating for midsized brokerages, saying an expected resurgence of corporate mergers and acquisitions as well as initial public offerings should lift the firms.
In addition to raising his coverage view of mid-cap brokers to "Attractive" from "Neutral," Goldman analyst Daniel Harris raised his rating on the M&A boutique firm Greenhill & Co. to "Neutral" from "Sell." Harris also raised price targets and revised earnings estimates for several stocks in the group.
Firms in the sector benefit from providing financial expertise to companies considering strategic tie-ups, but M&A activity has been quiet amid a
recession and credit crunch that have made dealmaking difficult due to a lack of financing.
But Harris said in a research note that the outlook is improving for M&A as well as for issuance of new stock through initial public offerings. Activity in both areas is typically cyclical, and IPOs create potential underwriting business.
"The M&A and equity issuance cycles are showing initial signs of improvement," Harris said in a research note.
The end of the current quarter and the fourth quarter "may form the first upward trend in these businesses in two years," he said. "There has been both qualitative and quantitative evidence of this, from increased equity backlog levels to reported higher levels of strategic discussion from management."
Harris also said mid-cap brokers' stocks are trading "at a modest discount" to historical averages.
Harris upgraded his rating of Greenhill's stock to "Neutral" from "Sell" and raised his six-month price target to $75 from $65 based on his increased earnings estimates for the company.
"With M&A potentially improving, Greenhill stands to benefit from this trend more than most peers," Harris said, noting that Greenhill has already announced more transactions so far in the third quarter than it did through the entire second quarter.
Harris raised his full-year 2010 and 2011 earnings estimates for five stocks in the group: Greenhill,
Evercore Partners Inc.,
Lazard Ltd.,
Jefferies Group Inc. and Piper Jaffray Cos. He kept estimates unchanged for Duff & Phelps Corp. and
Stifel Financial Corp., and cut his rating for
Raymond James Financial.
In reducing that estimate, Harris cited
Raymond James' "lackluster July 2009 operating data," particularly in commission and fee revenue, and continuing expenses to maintain its bank loan-loss provision.
In morning trading, shares were trading mixed. Shares of Greenhill rose $1.63, or 2.2 percent to 74.39;
Evercore fell 25 cents, or about 1 percent, to $25.04;
Lazard fell 27 cents, or about 0.7 percent, to $38.47; Jefferies fell 25 cents, or about 1 percent, to $22.72; Piper Jaffray fell 89 cents, or about 1.8 percent, to $49.76; Duff & Phelps fell 64 cents, or 3.6 percent, to $17.24;
Stifel Financial rose 22 cents, or about 0.4 percent, to $54.53.; and
Raymond James fell 51 cents, or about 2.2 percent, to $23.05.
