Do Greenhill's Misfortunes Present a Good Buying Opportunity?
How badly has Greenhill investment bank suffered in 2011? First, the AT&T (NYSE: T) and T-Mobile merger fell through. This action affected all of the advisers taking part in the deal, including Greenhill (NYSE: GHL). Not only did Greenhill lose out on millions of dollars in fees, but the dissolution sent the bank spiraling down in league tables. More recently, a tragic plane crash in Morristown, New Jersey costed the bank two prominent managing directors.
Taking into account the accident, a total of three senior bankers departed the firm in the last six months, a record set since the company's inception. Investors are wondering, however, if the bank's recent bout of misfortune represents any overarching trends for the company.
Over the last few years, Greenhill has steadily increased its revenues from financial advisory. Their investment revenues have been very volatile over the last few years, jumping from $120,000 to $82 million and back down to $25 million. Expenses have also been steadily increasing over the years, including salaries, rent, and other client related fees. As a result, the company's revenue has hit a three year low in fiscal year 2010.
Greenhill's cash flows have trended in a volatile manner over the last few years as well. For example, large amounts of capital expenditures and debt repayments resulted in a net $129 million outflow of cash. In fiscal year 2009, capital expenditures and other investments were minimal, results in a positive influx of $12 million. Last year, capital expenditures grew slightly, resulting in a $4 million increase in cash. While it appears that Greenhill is diligent on its debt payments and is continuously growing its physical holdings, some investors may prefer a steady cash flow.
Investors may also want to analyze Greenhill via financial metrics and comparable companies analysis. When trying to determine the company's relative value, Greenhill does not have the most positive trading ratios. Its price/earnings is 36.1 versus an industry average of 14.3, its price/book is 3.7 versus an average of 0.8, and its price/sales is 4.2 versus an average of 0.7. From a growth perspective, its three year revenue and EPS growth have both been negative. However, to keep things in perspective, its fiscal year 2008 performance is what primarily brought down annualized revenue and EPS growth metrics. Lastly, it has a very positive return on equity and net margin compared to direct competitors. It also operates at a very low debt/equity ratio.
Investors may want to consider investing in financial services, and may consider the historically strong pure-service investment bank, Greenhill. Especially considering the bank's recent misfortune, investors may consider other investment banks or financial institutions. On the other hand, given economic uncertainty, some investors may be convinced that major investment banks are terrible investments. In any case, investors will have to do more independent research to figure out if any financial institution is a good idea in today's markets.
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Traders who believe that Greenhill will continue to be a successful investment bank might want to consider the following trades:
- Long Greenhill by purchasing shares or call options. Greenhill currently appears to be close to a technical support level, so now may be a good time to buy.
- Short another similar company, like Evercore Partners (NYSE: EVR). You could short this company to hedge a long GHL trade or to accentuate your belief that Greenhill will dominate the boutique investment banking industry.
- Long an ETF like the Financial Services SPDR (NYSE: XLF). If a significant industry like investment banking is doing well, financial services itself will probably do well.
Traders who believe that Greenhill will not succeed in the future may consider the following positions:
- Short Greenhill after it breaches the $35 level, which appears to be a technical support level. The next support level appears to be at about $34.
- Long a competitor like Jefferies (NYSE: JEF), as someone bearish on Greenhill may believe that a large-cap competitor is more likely to garner market share.
- Buy put options as Greenhill's earnings announcement comes along. The company may not be able to sustain its costs as precious metals rallied significantly in Q3 2011
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