Zacks Industry Outlook Highlights Raymond James Financial, Evercore and Cowen
For Immediate Release
Chicago, IL – June 13, 2022 – Today, Zacks Equity Research discusses Raymond James Financial, Inc. RJF, Evercore Inc. EVR and Cowen Inc. COWN.
Industry: Investment Bank
Link: https://www.zacks.com/commentary/1937240/3-investment-bank-stocks-to-buy-despite-industry-challenges
The Zacks Investment Bank industry, which had been having a dream run since mid-2020, is now facing a tough operating backdrop due to several macroeconomic and geopolitical factors. This, along with costs related to technological upgrades and business diversification efforts, will hurt the industry players' financials.
Yet, the trading business, which had been normalizing after a solid performance during the pandemic era, is again witnessing improved performance on the back of heightened market volatility and client activity. Hence, Raymond James Financial, Inc., Evercore Inc. and Cowen Inc. are worth betting on despite near-term challenges.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions across the globe. These started as partnership firms focused on initial public offerings (IPOs), secondary market offerings, brokerage and mergers and acquisitions (M&As).
Gradually the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (comprising M&As, advisory services and securities underwriting), asset management and trading and principal investments (consisting of proprietary and brokerage trading).
3 Major Trends to Shape the Future of Investment Bank Industry
Slowdown in Underwriting and M&As: After a blockbuster performance last year, IPO, underwriting (mainly equity) and deal-making activities have considerably slowed down since the beginning of 2022. The primary reasons for shrinking investment banking (IB) activities are the ongoing Ukraine-Russia conflict and significant monetary tightening across the globe to control inflation.
These challenging market conditions are leading to a plunge in stock prices and slowing global economic growth, thereby hurting debt and equity issuances. While M&A activity remains decent and the deal pipeline looks healthy, there has been a substantial decline in M&A volumes. Thus, weak underwriting and advisory businesses are expected to hurt industry players' revenue growth.
Technological Upgrades Lead to Higher Costs: Innovative trading platforms, investments in technology and advertising are likely to support the overall operations of investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms. Given these efforts, investment banks are likely to face increasing technology-related costs, thereby hurting the bottom-line growth.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. From the beginning of second-quarter 2021, markets began to normalize and equity markets were less volatile following the extreme volatility recorded in 2020 and the first couple of months of 2021 due to the coronavirus-outbreak-induced uncertainty.
Then again, since the beginning of this year, market volatility has increased significantly on the back of several geopolitical and macroeconomic concerns. This has helped trading volumes, which along with substantial cash in the hands of investors, might boost trading income.
Zacks Industry Rank Indicates Bleak Picture
The Zacks Investment Bank industry is a 18-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #179, which places it in the bottom 29% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Over the past year, the industry's earnings estimates for the current year have moved 5.9% lower.
Before we present a few stocks that you may want to consider despite industry challenges, let's take a look at the industry's recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past year. While the stocks in the industry have collectively lost 18.8%, the S&P 500 composite has declined 6.8% and the Zacks Finance sector fell 8.5%.
Industry Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.37X, above the median level of 2.50X, over the past five years. This compares with the highest level of 3.85X and the lowest level of 1.35X over this period. However, the industry is trading at a huge discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 14.80X and the median level is 11.98X.
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. But a comparison of the group's P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's trailing 12-month P/TBV ratio of 4.22X and the median level of 3.76X for the same period are above the Zacks Investment Bank industry's respective ratios.
3 Investment Banks for Your Portfolio
Raymond James: This Zacks Rank #2 (Buy) stock is a diversified company based in St. Petersburg, FL. The company, along with its subsidiaries, provides financial services mainly in the United States, Canada and the U.K.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
RJF has accomplished several strategic deals over the past years, which has also helped its expansion into Europe and Canada. Earlier this month, it closed the deal to acquire TriState Capital Holdings, Inc., while in January, the company concluded the acquisition of U.K.-based Charles Stanley Group PLC. In March, the company announced a deal to buy SumRidge Partners, which will boost its fixed income capabilities. These deals, along with several past ones, poise Raymond James well for growth.
Though steadily rising expenses and current geopolitical and macroeconomic uncertainties make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, Raymond James' robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $20.1 billion, Raymond James is expected to continue benefiting from its scale and business expansion efforts. Its shares have lost 6.8% so far this year. The Zacks Consensus Estimate for fiscal 2022 earnings has moved up 3.8% to $7.46 over the past 60 days.
Evercore: This Zacks Rank #2 company is a premier global independent investment banking advisory firm. It also offers wealth management services. It operates from its offices and affiliates in North America, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the investment banking business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2019 due to lower advisory fees, the same witnessed a CAGR of 16.8% over the last four years (ended 2021).
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders' value with steady capital deployment activities.
EVR has a market cap of $4.2 billion. So far this year, shares of the company have declined 21.6%. The Zacks Consensus Estimate for ongoing-year earnings has moved 2.1% north to $12.78 over the past two months.
Cowen: Headquartered in New York, the company provides IB, research, sales and trading, prime brokerage, global clearing, securities financing, commission management and investment management services globally.
COWN is taking measures to tide over the tough operating environment and expand in newer areas of business. In sync with this, the company acquired Portico Capital Advisors in December 2021 to enhance advisory coverage in key high-growth technology sectors. Also, earlier this year, it launched Cowen Digital LLC, a division offering full-service digital asset trade and custody solutions.
The company also remains committed to enhancing its shareholders' value. As of Mar 31, 2020, share repurchase authorization worth approximately $320 million of Cowen Class A common stock. Also, the company has been regularly paying a quarterly dividend of 12 cents per share.
The Zacks Consensus Estimate for 2022 earnings has moved 16.2% upward to $5.53 over the past 30 days. The stock, presently carrying a Zacks Rank of 2, has plunged 30.6% in the year-to-date period. It has a market cap of $695.4 million.
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