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Released on Value Lab 11/1/23
Piper Sandler (NYSE:PIPR) is a company we occasionally cover. It is not a pure consulting company that offers both mediation and advice. Your M&A and consulting business is medium-sized and is developing particularly well relative to consulting colleagues. On the other hand, institutional brokerage might fare better, which should have expected strong performance. While PIPR gives us an interesting indication of mid-market resilience for our coverage of IBs, the valuation does not make it a buy.
Look at Q3
Let’s start with some really great disclosures from PIPR 10-Q where they give us complementary business information that really paints a picture of the markets.
Supplemental Business Information (SEC.gov)
The focus on finance and healthcare in mid-market M&A is posting decent numbers in terms of completed deals, and what’s mostly corporate finance exposure isn’t bad either given the impact of ECM and DCM declines. One might have expected declines of about 30% as the typical M&A and full corporate finance advisory business loses revenue. The quantity of deals here has only decreased by around 20% overall.
Segment Breakdown (SEC.gov)
Advisory engagements must also include M&A services, as advisory revenue on the same 9-month basis declined only about 10%, as did the decline in completed deals. Meanwhile, corporate finance services, which are more associated with ECM and DCM activities that are really struggling, are down more than 60%. The 40% drop in the number of equity advisory deals reflects this and also underscores that the scale of ECM and DCM exposure must also have fallen in value as markets plummeted and only the most intrepid sponsors and corporates took action.
Municipal finance also held up on a 9 month basis, although we see pressure on this segment in the last quarter, losing exposure to corporate finance which has been the typical culprit for depressing financial results. These government-exposed sectors have always been more resilient.
Thanks to resilience in municipal finance, M&A and advisory, the 9-month picture shows a fairly limited 25% revenue decline for the IB division, ahead of peers, however the latest quarter is more in line with broader peer group pressures driven by a decline in municipal finance business by more than 30%, resulting in some underperformance. It is clear that M&A activity in the financial and healthcare markets remains strong.
Better results could have been expected for institutional brokerage. Currently, the firm’s equity brokerage business is benefiting from consolidation distortion from the Cornerstone Macro platform it acquired last year. We’re not sure what the revenue contribution will be, but it could be at least $15 million to $20 million per quarter based on the total purchase price of over $60 million assuming earn-outs. Equity brokerage would thus be roughly at the prior-year level on both a 9-month and 3-month basis. Given an exceptionally volatile year in equity markets, we would have expected some outperformance. Fixed Income struggled, which was somewhat surprising given the volatility and reports from competitors suggesting they were able to generate growth in the fixed income portions of their capital markets businesses.
bottom line
Mid-market M&A advisory has outperformed other segments of the advisory market. Moelis (MC) was down 30% over the 9 months while PIPR for that deal was down just 10% and it shows the impact funding is having on Marquis and Megadeal customers and how the mid-market is better off is to survive the current liquidity accelerator pedal. However, on the whole, PIPR doesn’t particularly impress. Furthermore, while a return to certainty in the markets will boost all of its businesses, we believe these single digit earnings returns are not enough, implying a 15x 2023 forward PE where we find a midpoint between now and wild 2021. We know what it’s like to work in markets where you can’t find value because the multiples are so high – the current market is not like that. There are still so many opportunities as investors remain dazed by macros that have been pointing in the right direction for months. PIPR is not unconvincing, it just isn’t convincing enough.
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