Successful hedge fund managers get a lot of press, but for every multi-millionaire, there are hundreds who lost their own money – and their clients’. From 2011 to 2020, hedge funds collectively made five percent per year as compared to the S&P 500, which had an average annual return of 14.5 percent.
Overall, value investors fare much better. The strategy is simple – buy a fundamentally solid company at a good price, then hold… and hold… and hold. Warren Buffett (net worth $116.7 billion) is perhaps the best-known modern value investor, but he isn’t alone. Other notable value investors include:
- Tom Gayner – net worth $58.9 million
- Michael Lee-Chin – net worth $2 billion
- Mohnish Pabrai – net worth $150 million
Certainly, it is far too late to duplicate the trades that made these investors millionaires – or billionaires – but there are always new opportunities to buy stock in undervalued companies.
One massively undervalued stock is getting little attention – so far – which means it could be a great time to buy. The name of this great stock you’ve never heard of? Moelis & Company.
Moelis Has Global Reach & World Class Pedigree
In essence, Moelis & Company is an independent investment bank that operates on a global scale. It has 21 locations worldwide, including offices in the United States, China, Europe, India, the Middle East, Australia, and Latin America.
Its core function is to provide comprehensive financial advisory services across major industries to support clients in achieving financial goals.
Moelis was a winner right out of the gate. It was founded in 2007, and it hit the top ten list of US-based merger and acquisition advisors within a year.
Some of the largest transactions completed within the firm’s first 12 months included the Blackstone Group’s $26.5 billion acquisition of Hilton Hotels and InBev’s $61.2 billion acquisition of Anheuser-Busch. Moelis also advised Yahoo as it defended against Microsoft’s unsolicited offer to buy the company for $44.6 billion.
The firm is frequently recognized for excellence in the field, and it has been tasked with some of the largest and most complex transactions in the corporate world. For example, in 2019, Moelis served as financial advisor for the Walt Disney Company’s $85.1 billion acquisition of 21st Century Fox. In 2021, it was the exclusive financial advisor for Hertz’s $24 billion restructuring.
Moelis differentiates itself from other investment banks through creative problem-solving. The team takes a collaborative approach to develop original solutions for the most difficult transactions. More importantly, the firm has global experience and expertise across industries, which ensures effective design and execution of strategies.
In his most recent letter to shareholders, Chairman and CEO Ken Moelis pointed out that Moelis & Company is uniquely positioned to provide support as the world eases into post-pandemic life. He said:
“The world is embarking on a whole new chapter, attempting to consolidate a series of changes that would have under most normal circumstances taken decades to incorporate. In the current environment, these same changes will likely now happen in months and years. As a result, in volatile times like this our services will be in high demand.”
Moelis Q4 and Full Year 2021 Financial Results
Moelis reported its fourth-quarter and full-year 2021 results in early February 2022, and it was almost all good news. The firm achieved record full-year revenues, along with impressive gains in net income and earnings per share. Highlights from the financial reports include:
Q4 2021
- GAAP Revenues – $425.0 million
- Adjusted Revenues – $417.3 million
- Diluted Earnings Per Share – $1.41
- Adjusted Diluted Earnings Per Share – $1.42
Fiscal 2021 Full-Year
- GAAP Revenues – $1,540.6 million (compared with 2020’s $943.3 million)
- Adjusted Revenues – $1,558.0 million (year-over-year increase of 65 percent)
- Diluted Earnings Per Share – $5.34 (compared to 2020’s $2.95 per share)
- Adjusted Diluted Earnings Per Share – $5.40 (year-over- year increase of 86 percent)
- Adjusted Pre-Tax Margin – 34 percent (vs. 29 percent in 2020)
In the letter to shareholders, Moelis pointed out that by ensuring the company is on solid financial footing, it doesn’t have the distraction of “fighting its own fires in the background.”
Instead, Moelis & Company can give its full attention to supporting clients through challenges and uncertainties.
Why Is Moelis Stock A Buy?
One of the most interesting features of Moelis stock is that the 2021 gains aren’t a one-time fluke. In 2020, Moelis stock returned 62 percent. When 2020 year-end results were reported, revenue was up by 26 percent year-over-year, and net income increased by 61 percent.
These gains were primarily due to stellar fourth-quarter 2020 activity. The firm advised on the most mergers and acquisitions in a single quarter than it had since it opened in 2007. In the fourth quarter of 2020, revenue increased by 89 percent over fourth-quarter 2019, and net income went up by 490 percent.
As of the end of 2021, Moelis doesn’t have debt. It does have a strong balance sheet that includes $721.2 million in cash and short-term investments, and it has prioritized returning value to shareholders. For example, Moelis announced a $0.60 per share dividend in addition to the two special dividends – and regular dividends – paid in fiscal 2021.
Moelis also repurchased 1.9 million shares of common stock, which puts the total amount of capital returned to shareholders at roughly $575 million.
For value investors, Moelis stock is a buy because it is undervalued by roughly 43 percent based on a discounted cash flow forecast model. The company has a price to free cash flow ratio of 3.08, which indicates that there is plenty of room to generate additional revenues. To put it another way, most investors consider a price to free cash flow ratio under 15 to be a positive sign.
Finally, there is every reason to believe that Moelis will deliver on its organic growth strategy. In 2021, the firm added 11 Managing Directors, many of which were internal promotions. Another 16 internal promotions to Managing Director have occurred year-to-date in 2022, positioning the firm to take on more of the large, complex transactions in which it excels.
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