Should You Ever Invest in Financial Services?
Since the markets started to collapse in late 2007, the general public has placed the majority of the blame on banks and other financial services institutions. Apart from garnering negative perceptions, many American banks have significant positions in risky assets, including retail mortgages and shaky sovereign debt.
Some financial services institutions, however, may be offering up opportunity for investors. Evercore Partners (NYSE: EVR) is a small-cap investment bank focusing on financial advisory and asset management services. Unlike major counterparts such as Goldman Sachs (NYSE: GS) and JP Morgan (NYSE: JPM), Evercore does not involve itself in capital markets or financing services, which can create significant conflicts of interest between a bank and its clients.
One thing to remember, however, is that Evercore's business model is heavily dependent on broader economic conditions. During crises like the housing collapse a few years ago, mergers and acquisitions slow down significantly. Investors also tend to pull their money out of risky assets such as stocks during market and economic turbulence. Given the current economic uncertainty and attendant stock market volatility, now may be a risky time to invest in banks.
Evercore's balance sheet has grown over the last few years despite the recent credit crisis. One of the biggest factors that bolstered Evercore's 2010 balance sheet is the goodwill line item. Interestingly, the company's cash position decreased from $207 million to $141 million in 2010.
On the other hand, Evercore's liabilities decreased significantly. Long-term debt decreased from $168 million to $98 million. This may explain the company's cash decrease. Shareholders' equity also increased from 2009 to 2010. Paid-in capital increased, whereas retained earnings decreased. Treasury stock, which measures stock buybacks, increased from $4 million to $35 million.
Financial metrics can help investors determine a company's growth prospects and overall value. Considering price measurements, Evercore may not be that cheap. Compared to competitors, the company trades at a premium in terms of price/earnings, price/book value, and price/sales ratios. Furthermore, Evercore's return on equity is only 3.8% compared to competitors' average return of 6.9%.
Growth measures including operating and net margins are also shaky for Evercore. Its margins are nearly half of those claimed by its competitors. While this may be an artifact of the credit crisis a few years ago, other banks were affected as well. Lastly, the company's revenue growth has not been as rapid as that of competitors. Evercore has only been able to grow 5.7% annually while competitors grew 10.3%.
Evercore operates a lean company that attempts to provide the best financial advisory business without conflicts of interest to its clients. When considering its financial statements and metrics, however, it may or may not be a good opportunity for investors. In general, banks are heavily affected by overall market conditions, and if investors consider the recent pullback in stocks as a time to buy, Evercore may be appropriate to consider.
Evercore Partners is currently trading at about $23 and is down about 32% year to date.
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