Greenhill (GHL) Stock Price Not Justified; Barron’s

In recent years, Greenhill & Co., Inc. GHL has been regarded as one of Wall Street's best-managed firms. According to Barron’s, the financial advisory firm has been awarded with the sector’s highest price/earnings ratio. Currently, the company is trading at 30x estimated 2010 profit of $2.54 per share. This valuation is higher than that of other advisory firms. Investors bullish on Greenhill justify the stock’s higher valuation by pointing to an expected boom in the M&A market. Greenhill backers also believe that the company can generate earnings of $4 per share this year. However, Barron’s believes that this may be difficult to achieve. To achieve such a number, Greenhill will have to generate revenue of $500 million and a net profit margin of 25%. Considering that the company had a first-quarter revenue of $36 million, this looks a difficult target to achieve. In fact, at the peak of the boom in M&A activity in 2007, the company’s advisory revenue stood at $367 million.