Greenhill and Co's Valuation Out of Whack (GHL)

This week's short candidate is Greenhill & Company (GHL), an M&A advisory bank run by founder Robert Greenhill. Its stock, fueled by a surge in global M&A activity, has exploded over 100% in the last 52 weeks.

Greenhill and Co did a secondary offering this week, issuing 4M more shares and raising north of $220M dollars. Unfortunately, none of the profits of the sale will be going to the firm. That got us thinking.

Understand: Bob Greenhill cut his teeth at Morgan Stanley (MS) and eventually went on to head their killer dog investment banking division. He takes no prisoners and if anyone can run a merchant bank, it's him. So in 1996, he did what any good capitalist would do -- he founded his own bait and tackle shop and quickly started pursuing the hottest deals on the Street.

All that said, there are a couple of reasons why at $70, shares of his eponymous outfit could be in a bloody correction.

This stock is fairly valued at $32-$36 dollars on our DCF/comparable analysis assumptions. What it is doing up here at 30 X EPS (more than twice the industry average) and 15 x book (most banks go for 2.5 x book value) is of great concern -- clearly it is a result of pent up demand coupled with a razor thin float (14M shares). Additionally, short interest is already high -- over 14% of the float, in fact. Eventually, the shorts will bring this stock down to a more realistic valuation.

Lastly, the competitive environment GHL operates in is unattractive; GHL competes directly with Morgan Stanley and Goldman Sachs (GS). Goldman Sachs is the world's largest M&A advisor and netted $6B in profits last year. Analysts expect Goldman to earn as much as $16 a share in 06, a 38% jump from 2005's EPS. Clearly, Goldman is not the sort of heavyweight you want to step in the ring with.

The writing is on the wall: If you own GHL, it's time to take profits.

GHL 1-yr Chart

Comments

[Dan Jacome:]

We are resuming coverage this week on GHL, and this time we're buyers. The stock feel sharply after our initial 2006 bear piece (from 70s to 50s), but our systems recently lit up as it appears GHL had a monster 2007 year and the stock is testing the upper 70s, a 2 year resistance whose breakage would entail new ground for this under the radar screen bank stock.($1.8B mkt cap).

Report will be around later this week -~ DJ

2008 Mar 31 09:22 PM