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On Thursday, Morgan Stanley (NYSE:MS) upgraded Houlihan Lokey (NYSE:HLI) stock from Underweight to Overweight, while simultaneously reducing the price target to $190 from $201. The shift to a more favorable rating comes as analyst Ryan Kenny identifies Houlihan Lokey as a more defensive investment option. Kenny’s analysis suggests that the company is well-positioned to manage earnings volatility in bear market scenarios, citing two main reasons for the upgrade. This defensive positioning is supported by InvestingPro data showing a beta of 0.73, indicating lower volatility than the broader market, while maintaining strong financial health with an overall score of "GOOD."
Firstly, Houlihan Lokey has maintained a consistent adjusted compensation ratio at 61.5% for the past three years. Secondly, the firm benefits from a resilient revenue mix, with a significant portion derived from restructuring and Financial and Valuation Advisory (FVA) services. According to Kenny’s assessment, restructuring accounts for 27% of the firm’s forecasted revenues for Fiscal Year 2024, and FVA makes up 13%, with approximately 40% of these revenues being non-cyclical. Recent InvestingPro data reveals impressive revenue growth of 22% over the last twelve months, with a robust gross profit margin of 94%.
Morgan Stanley’s positive stance on Houlihan Lokey also acknowledges the company’s effective cost management strategies, such as Project Solo. The $190 price target is based on a 20x target price-to-earnings (P/E) ratio against projected 2026 earnings per share (EPS) of $9.49, with the adjusted compensation ratio remaining steady at 61.5%. In contrast, the bear case scenario price target of $119 applies an 18.5x target P/E ratio to an anticipated 2026 EPS of $6.44, with a slightly higher adjusted compensation ratio of 62.0%. According to InvestingPro’s Fair Value analysis, the stock appears slightly overvalued at current levels, though it maintains strong fundamentals with a Piotroski Score of 8 and has consistently raised dividends for 10 consecutive years.
The upgrade reflects Morgan Stanley’s confidence in Houlihan Lokey’s ability to navigate market downturns effectively, leveraging its strong management of compensation costs and the stability provided by its diversified revenue streams. This move by Morgan Stanley suggests a notable shift in their outlook for Houlihan Lokey’s financial performance and stock resilience in the coming years. The company’s solid financial position is further evidenced by its healthy current ratio of 1.35 and impressive return on equity of 19%. For deeper insights into HLI’s valuation and growth prospects, investors can access the comprehensive Pro Research Report available on InvestingPro.
In other recent news, Houlihan Lokey reported impressive financial results for the third quarter of fiscal 2025, with earnings per share of $1.64, surpassing analyst expectations of $1.49. The company’s revenue reached $634 million, exceeding the forecast of $591.45 million, marking a 24% year-over-year increase. The Corporate Finance segment was a significant contributor, with a 36% rise in revenues. Despite the strong financial performance, the stock experienced a slight decline in after-hours trading. Analysts from firms like UBS and Goldman Sachs noted the positive outlook for fiscal 2026, with expectations of continued improvements in the M&A markets. In other developments, Kraft Heinz (NASDAQ:KHC) is reportedly seeking to sell its Italian baby food brand, Plasmon, with investment bank Houlihan Lokey facilitating the sale. Binding offers for the brand are expected by March. These recent developments highlight the dynamic activities within these companies.
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