3 Reasons JPMorgan Initiated Houlihan Lokey At Overweight

JPMorgan initiated coverage of Houlihan Lokey Inc HLI with an Overweight rating and a $42 price target. The optimistic assessment was based on the company's leadership position, growth opportunity and institutionalization.

Analyst Kenneth Worthington believes the company's leadership position in the three businesses it operates offers investors somewhat better activity and pricing resiliency than peers in the general cyclical businesses. The analyst sees the company as a top firm in the financial advisory businesses, which he believes would drive potentially greater durability, higher growth and less pricing pressure than seen at smaller peers.

Therefore, Worthington sees the earnings stream as somewhat more stable and potentially more reliable in a collection of generally cyclical operations.

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JPMorgan also believes the company has growth opportunity in building banking share through segmentation and international expansion. The company can grow its middle market M&A market share by further segmenting industry verticals to attract bankers and win business from regional and other smaller boutiques.

The analyst also expects restructuring growth to be driven by better market conditions than share gains, and feels sector disruptions could drive growth than recession, which in fact would likely harm its banking business.

Houlihan's strategy of focusing on offering clients its broad, firm resources and expertise enables it to drive strong economics at a solid and sustainable margin, as value is driven more by firm capabilities than the relationships of a few individuals.

"In terms of valuation, HLI's stock has appreciated meaningfully this year, but we see enough potential upside to justify an Overweight rating," Worthington said.