Buckingham: 4 Reasons Why Houlihan Lokey Has A Favorable Setup

Investment bank Houlihan Lokey Inc HLI's "highly diversified" franchise and middle-market focus have reduced its exposure to earnings volatility and competitive risks and set it up for long-term growth, according to The Buckingham Research Group. 

The Analyst

Analyst James Mitchell initiated coverage of Houlihan Lokey shares with a Buy rating and $54 price target, suggesting 22-percent upside.

The Thesis

Houlihan Lokey is poised for above-average long-term growth through market share gains in M&A; growth in the capital marekts segment; private equity firms using cash reserves; and accretive bolt-on acquisitions, Mitchell said in a Thursday note.

The analyst said the stock's favorable set-up is based on the following reasons: 

The company's guidance on near-term softness in restructuring is reflected in expectations.

• Industry databases "materially underestimate" the company's pipeline, and the consensus estimates do not incorporate accretion from recent acquisitions.
• Mid-market M&A, which the company specializes in, is immune to geopolitical overhangs such as trade wars and antitrust concerns.
• Potential upside exists for capital return expectations. The analyst estimates annual free cash flow equals 6 percent of Houlihan Lokey's market cap, and he expects a 25-percent dividend increase and a stepped-up buyback program following the company's May board meeting.

Buckingham estimates the most M&A recent deal will add 5-10 cents to earnings per share in the near term, which is not reflected in estimates.

The Price Action

Houlihan Lokey shares are up about 31 percent over the past year.

The shares were up 2.26 percent at the time of publication Thursday. 

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