This financial services company reported record revenue, net income, and earnings per share for the first nine months of the year.
Oppenheimer Holdings Inc. (OPY)
From Hughes Investment Management
Looking at one of the most undervalued and underfollowed names in the stock market, Oppenheimer is a long-dated money manager and broker, which name is quite famous on Wall Street. But besides its reputation, the stock is widely underfollowed and almost unknown. It’s trading at ridicule multiples even for a financial stock, with a P/E of 4 (S&P500 P/E stands at 28) and a P/B below 1. There are no major issues nor specific idiosyncratic risks that could justify such a super-low valuation given to this name. Indeed, in the last years, the company reported strong results, from revenues growth (+10% CAGR from 2016 to 2020) to margins (net income margin well above 10% for every year).
Stock dilution has been virtually zero, and instead, shareholders received modest dividends during these years (dividend yield above 1.5%). For Q1 and Q2, 2021, OPY reported, respectively, about $3 and $2.5 EPS, well above 2020 results. In the end, it’s all about knowing the existence of this stock. No analyst is following the company, and retail investors are focused on tech and cryptos—the perfect setup for a deep-value play.
OPY is a very good business, led by strong, seasoned management. The company gets that the money management industry is changing and it is directing efforts to the right way. Revenues continue to be strong, despite lower management fees across the industry, and compensation as a percentage of revenues is limited, positively affecting margins. The overall results are much better than before the pandemic, and the strong economic recovery is pushing momentum in the M&A sector.
OPY is set to earn $3 and $8-10 respectively. Just to give some perspective: the stock is trading at $44 and is set to earn as much as $10 EPS only in Q4. Horribly cheap.
With the markets at all-time highs and inflation that will probably cause a rise in interest rates before 2023, the environment appears positive for a re-rate of financial stock multiples. This could be the case with OPY as well. The other important factor that could trigger a big and fat jump in the stock price is an acquisition. Since OPY has a good business model, good competitive advantage, and super cheap multiples, many financial institutions could think of Oppenheimer as a buy. The CEO and Chairman could think of a successor, but in case this search fails, he could go out to find a buyer for the company. He currently owns about 25% of Class A stock and 98% of Class B stock, with the majority of the voting power.
OPY is a financial company so a DCF wouldn’t make much sense. Indeed, this business should be valued by using more common metrics, such as the P/E and P/B multiples. Since the overall value may vary based on what will trigger the re-rate (changes in market sentiment or acquisition), the valuation will be divided in scenarios.
- Low-case scenario: modest changes in multiples following the strong results of Q3 and Q4. The stock remains deeply undervalued and the market will continue to chronically underestimate their future results. The multiples will be a fwd P/E (for 2021E) of 4, fair price set at $60. Probability at 30%.
- Moderate scenario: good market reaction at the earnings announcement. The stock will face a modest re-rate and OPY’s multiples will head towards the market average for financial companies. The P/E (always based on 2021E results) will be 6, fair price at $90. Probability at 50%.
- High-case scenario: the current CEO and Chairman decides to leave. At this point, since he controls all the voting power necessary to complete the deal, he will look for a buyer. In case of an acquisition, the multiple assigned would be much more generous, and aligned with market average. In this scenario P/E is set at 8, with a fair price of $120. Probability 20%.
The weighted (for different probabilities) fair price for Oppenheimer is about $87. This result implies an overall upside potential of more than 65%.
Marco Brecciarili and Douglas Hughes, Hughes Investment Management, banknewsletter.com, 888-814-7575, December 2021