Evercore (NYSE:EVR) stock has dropped 6.2% and Moelis & Co. (NYSE:MC) stock has slid 6.9% in Friday midday trading after UBS analyst Brennan Hawken downgraded the investment bank advisory firms to Sell from Neutral as both are likely to see fixed compensation expense ratio rise while M&A activity stays sluggish.
On Evercore (EVR): "Negative operating leverage is likely to persist given that EVR's public revenue is down 40% Y/Y, compared to a 29% average decline across the boutiques," Hawken wrote in a note to clients."
And while the company has invested in diversifying away from core M&A, its revenue is still heavily weighted toward advisory fees (80% of total revenue), he said.
Hawken sees fixed compensation adding considerable "upward pressure to the company's adjusted comp ratio," as he forecasts 65% in H2 2022 vs. 59% in H1 2022. "Moreover, MC's revenue picture continues to deteriorate as the public revenue pipeline is down >50% Y/Y, and the pace of replenishment remains sluggish."