Goldman Sachs On Investment Banks: Bullish On Jefferies, Sidelines Evercore

Goldman Sachs Group is making notable shifts in its stance on two players in the investment banking sector. A Tuesday note issued to investors highlighted an upgrade for an asset management company and a downgrade for a financial restructuring business.

Here's what investors need to know.

The JEF Takeaways: James Yaro upgraded Jefferies Financial Group Inc JEF investment bank from a Neutral rating to a Buy rating with a $40 price target.

Yaro said Jefferies’ promising long-term growth potential, particularly from its ongoing hiring efforts which have been considerable in recent years is cause for the upgrade.

Near-term prospects are strong, Yaro said, with Goldman forecasting a 27% revenue growth in 2024, which is 8% above its peers. Additional benefits could come if Jefferies completed the announced wind-down of their merchant bank, Yaro noted, as it could lead to a significant ROTCE uplift.

The EVR Takeaways: Yaro's outlook is not as positive for Evercore Inc EVR, which was downgraded from a Buy rating to a Neutral rating with a $140 price target.

Goldman noted concerns about Evercore's near-term revenue growth, with projections indicating a 17% year-over-year revenue decline in 2023. Yaro said Evercore has faced more pressure on its M&A backlog compared to peers, and there are rising antitrust concerns in both the U.S. and Europe which could adversely affect the investment bank, especially given its considerable exposure to large-cap M&A.

The path to reclaiming its best-in-class margin profile might extend beyond 2025, Yaro said.

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Why It Matters: Goldman's shift underscores what the investment banks are doing behind the scenes. While Jefferies is poised for growth due to strategic initiatives, investments in talent and beneficial partnerships, Evercore is facing a challenging landscape marred by revenue concerns and regulatory hurdles.

Jefferies’ partnership with SMBC stands out as a strategic move to bolster its position in the market, Yaro said, enabling it to navigate an environment where many U.S. banks are tightening balance sheets.

On the other hand, Evercore’s challenges highlight the importance of diversifying revenue streams and the potential pitfalls of over-reliance on certain sectors, including M&A.

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