Sunday, May 14, 2006

Greenhill and Co's Valuation Out of Whack

This week's short candidate is Greenhill and Company (GHL), a 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, its 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.

About Us | In the News | Management | Contact Us | Archive | Premium Membership | Terms of Use | Privacy Policy | Careers | FAQ

All quotes are 15 minutes delayed. Copyright © 2006 by Catablast! Media Group LLC, part of the SeekingAlpha network. Web Design by Synexio Systems. All Rights Reserved.