OPY - Oppenheimer Holdings, Inc.

[Lowlight]

Looks like there isn't an existing thread for Oppenheimer.  Like many ideas, I stumbled across this one on VIC.  It was written up by Cuyler, who continues to be my favorite VIC contributor, so I have a natural tendency to like his ideas more than others (for a more thorough analysis, please take a look at his write-up).  I think OPY represents a great risk/reward play today with ~100%+ upside in a sale and little to no downside as a standalone entity.

 

OPY trades at $25.05/share today, has a market cap of ~$345 million, debt of $150 million and therefore an EV approaching $500 million.  The company has four distinct segments: Private Client (61.4 billion in AUA), Asset Management ($26.6 billion in AUM), Capital Markets ($72 million in 1Q15 revenues and $6.7 million in pre-tax income), and Commercial Mortgage Banking ($8.4 million in 1Q15 revenues and $4.0 pre-tax).  The company's chairman, Bud Lowenthal (age 68) owns 22% of the company and has the overwhelming majority of the voting rights through the Class B shares he owns.  Today, the company trades at 95% of TBV of $26.25/share.  Earnings should be north of $1.50 this year and perhaps closer to the low $2.00 range.

 

The firm's Commercial Mortgage Banking unit is a non-core business and one that perhaps management will sell in the near future.  It is probably worth somewhere near $50 million ($3/share) but possibly more based on volume increases and 1Q15 run rate pre-tax income.  For Capital Markets, I don't really have a good sense of what they would be worth as a standalone entity so I assume 6x 2014 pre-tax income for a valuation of $106 million (~$7/share).  This leaves the Private Client and Asset Management businesses which is where the real value of OPY lies.  For Asset Management (AUM of $26.6 billion) I use a range of 1% - 2% of AUM for a value between $266 million ($18/share) and $532 million ($36/share).  For Private Client ($61.4 billion in AUA), I use a range of .75% - 1.0% of AUA and come to a value of $460 million ($31/share) and $614 million ($41/share).  Back out debt of $150 million ($10/share) and assume $40 million in corporate overhead needed (40% of run rate overhead) by a strategic buyer at an 8x multiple for $320 million ($22/share). 

 

Summing this together I come to a value between $27/share and $55/share.  On an EV/EBITDA basis the company trades around 7.5x 2014 adjusted EBITDA.  Both the low end assumptions on AUA and AUM and the reasonable EV/EBITDA multiple make this attractive on a standalone basis as perhaps now that some regulatory overhang is behind the company, there will be a re-rating of the assets.  At 95% of TBV and earnings of $1.50/share, it seems like the downside is well protected (although ROE isn't where it needs to be just yet).  Additionally, I believe the AUA and AUM low end assumptions may be far too low, considering Stifel acquired a forced-seller in Sterne Agee at .75% of AUA. 

 

While I don't believe there are any immediate catalysts to force OPY to sell, the regulatory environment is one in which it doesn't make sense to operate as a small to mid-sized player without either growing aggressively through organic channels or being an acquirer. 

 

 

[Guest notorious546]

Scott miller at Greenhaven road also holds a stake in this. I think you've outlined the story fairly well.

 

http://www.greenhavenroad.com/s/Greenhaven-Q1_2015_FINAL-cy00.pdf

 

I would be quite surprised to see anyone base their intrinsic value estimates based on an EV/EBITDA number for a financials company. P/E or aum basis for the individual parts appears to be a more prudent way to evaluate the valuation of the company.

 

I haven't dug into the auction rate securities fines that the company has paid over the past few years (I think that among other things has been a large driver for the below average ROE).

 

Lastly, can you post the VIC write up? I'd like to see what they have to say on risks.

[Packer16]

EV/EBITDA is a quite common metric used in the valuation of asset managers and financial planners.  Asset managers typical sell at 10x EBITDA and financial planners a little less at 8x EBITDA. 

 

Another comps could include Lazard (about 50% AM and 50% advisory).

 

Packer

[Guest notorious546]

EV/EBITDA is a quite common metric used in the valuation of asset managers and financial planners.  Asset managers typical sell at 10x EBITDA and financial planners a little less at 8x EBITDA. 

 

Another comps could include Lazard (about 50% AM and 50% advisory).

 

Packer

 

doesn't the I in EBITDA exclude interest income. which is an meaningful revenue generator for a company like this? on second thought, my logic is more appropriate for lenders... which opy is not.. sorry

[Lowlight]

EV/EBITDA is a quite common metric used in the valuation of asset managers and financial planners.  Asset managers typical sell at 10x EBITDA and financial planners a little less at 8x EBITDA. 

 

Another comps could include Lazard (about 50% AM and 50% advisory).

 

Packer

 

Packer - is the 10x EBITDA multiple typical of what public asset managers sell for in the stock market or in private transactions?  I don't have any good data on going private comps (I don't consider the Sterne sale as being similar), but it seems to me that much of the overhead at OPY would be eliminated in a strategic sale, making the EBITDA multiple far higher when including the overhead expense in OPY's historic financials. 

 

I will take a look at LAZ. Quick glance shows they trade in line with your figures above, but at a significantly higher multiple of revenues.  I'm guessing their fee structure is superior to OPYs as I doubt the operating leverage in these businesses provides that meaningful of a boost to EBITDA.

[Lowlight]

Scott miller at Greenhaven road also holds a stake in this. I think you've outlined the story fairly well.

 

http://www.greenhavenroad.com/s/Greenhaven-Q1_2015_FINAL-cy00.pdf

 

I would be quite surprised to see anyone base their intrinsic value estimates based on an EV/EBITDA number for a financials company. P/E or aum basis for the individual parts appears to be a more prudent way to evaluate the valuation of the company.

 

I haven't dug into the auction rate securities fines that the company has paid over the past few years (I think that among other things has been a large driver for the below average ROE).

 

Lastly, can you post the VIC write up? I'd like to see what they have to say on risks.

 

http://www.valueinvestorsclub.com/idea/OPPENHEIMER_HOLDINGS_INC/136379

 

Above is the link to the VIC write-up.  I have a 45 day delayed access account which I assume is the norm for non-VIC contributors.  Let me know if there are issues with accessing this link.  Thanks for posting Greenhaven Road's comments.  A little better laid out than mine but very similar SOTP valuation. 

 

In my mind the ARSs still act as a $110 million contingent liability.  No doubt that they have contributed to slightly lower earnings in the past but I don't think this was the only cause of lower ROEs.  It is unlikely the ARSs are put back to OPY at the same time and therefore they won't sink the company.  But it is an unknown liability hovering over the company.  While they have value, they have no liquidity so OPY definitely doesn't want to buy back any more than they have to.  In any event, I see them as a manageable possible issue for management. 

 

[Lowlight]

Found the link below this morning.  Looks like Stifel continues to be active in acquiring asset managers.  Again, they are picking up a business which has been troubled for a while.  It won't be a good comp for the far stronger/healthier OPY but will provide additional data points in the space.

 

http://advisorhubinc.com/barclays-wma-its-stifel/

[Lowlight]

First Republic buying Constellation Wealth Advisors ($6.1 billion AUM) for $115 million or 1.9% of AUM.  It appears all six partners signed long-term contracts to stay on with First.  So I don't think this is a perfect comp for OPY but it is definitely directionally correct.  I think you can assign a 25% or so discount to account for the fact that all OPY advisors in Private Client wouldn't stay on board in a sale. At 1.5% of AUM, the private client business is worth $390 million, $20 million more than OPY's market cap. The $60 billion in remaining AUA, investment bank, and mortgage banking unit are easily worth multiples of the $150 million in debt.  I am convinced OPY is trading at <50% of private market value.

[ratiman]

OPY will be a great investment once CEO AG Lowenthal dies. If you know when that is going to happen, you should make lots of money. Otherwise the sotp or break up value of this company is irrelevant because there will be no breakup. If Lowenthal sold off the brokers, he would be left with a money losing investment bank with no reason for existing. If he shut down the investment bank, he would no longer oversee a vast global investment bank with offices in Zurich and Hong Kong, and he wouldn't be invited to charity galas with Blankfein and Dimon, and what fun is that? This company exists solely to stroke the ego of Lowenthal and until he dies it's dead money.

[Homestead31]

he is ~70 years old...  it is not a stretch to think that he is considering an exit strategy, and given the current M&A market, a sale is the obvious option.  you are of course correct that it is impossible to predict a sale, but the odds do seem rather favorable here...

 

additionally, even outside of a sale the stock is cheap vs. its historical valuation on a variety of measures.

[ratiman]

His exit strategy is "over my cold dead body."

[no_thanks]

His exit strategy is "over my cold dead body."

 

sounds like you have had some personal experience with him or something.  what makes you so confident? 

[Homestead31]

ratiman, the best posts here are always those from people who have some sort of personal insight or experience, whether it be through industry experience or experience with the people involved.  it would be great if you could share some personal anecdotes that inform your strong opinions.  thanks!

[ratiman]

All you need to know is one thing: Geneva office. There is absolutely no reason for a fourth rate, money-losing bank that's largely focused on selling mutual funds to old ladies in Schenectady to have an office in Geneva. The office in Geneva serves one purpose, to fluff the ego of AG Lowenthal. Oppenheimer can't compete with the big banks in its own backyanrd and now it's suddenly going to compete with UBS and CS and GS and DB in Europe? It's ludicrous. The office was opened just last year as part of a European expansion. Oppenheimer doesn't make money in the US and it's suddenly expanding in Europe?

 

The idea that he's going to face mortality and decide to leave his post before he dies is, I think, wishful thinking. Look at Cohen at Cowen, it's the same phenomenon. These banks are trophies and they are not run to increase ROE. It's the same as a studio in Hollywood.

 

There is too much value investing that's based on "this is cheap, things could change." OPY is a value trap. 

[Nassau]

It is utterly absurd to suggest that the man who chairs and owns a large stake in an investment brokerage firm does not care about maximizing the value of his investment for the sake of himself, his family and his reputation - that is his business!  This is not a vanity company like an NBA team or fashion line or something, it is a business.  If it were about vanity, they would probably conduct conference calls, seek analyst coverage, etc.

 

The stock is very cheap and it is reasonable and rational to expect value to be unlocked by these investment veterans.  I figure it might be worth $60 in a strategic sale based on asset management and retail brokerage comps, and adding in the value of the separate real estate division.  The investment banking unit I value at zero for the heck of it.

[ratiman]

One reason there is so much overcapacity in banking is because these vanity banks are supported for years by revenue from the asset management business. That's true at Cowen, PJ, OPY, and probably some others. But the bank is really just the excuse that's used to steal from shareholders. FBR is the only small bank that's run for the benefit of shareholders, and that's because it's looking to get bought. Bud doesn't do conference calls because he doesn't want to answer questions. That's obvious. The evidence that it's a vanity bank is that Bud hasn't shut it down already. 

[Nassau]

Thanks.  Your comments have confirmed my initial suspicion that you have no idea what you're talking about.  Bud Lowenthal's sole perquisite is a parking place.  No private jets or that type of thing.  I doubt Bud would even do anything vain after putting $200 million in his pocket in a sale.

 

Lots of M&A out there where bigger banks like Stifel, Raymond James, Wachovia and others by smaller brokers like Morgan Keegan, A.G. Edwards, Piper Jaffray, Legg Mason, et al for high prices (1-2% of client assets).

 

This is how business works.

[morningstar]

It is utterly absurd to suggest that the man who chairs and owns a large stake in an investment brokerage firm does not care about maximizing the value of his investment for the sake of himself, his family and his reputation - that is his business!  This is not a vanity company like an NBA team or fashion line or something, it is a business.  If it were about vanity, they would probably conduct conference calls, seek analyst coverage, etc.

 

The stock is very cheap and it is reasonable and rational to expect value to be unlocked by these investment veterans.  I figure it might be worth $60 in a strategic sale based on asset management and retail brokerage comps, and adding in the value of the separate real estate division.  The investment banking unit I value at zero for the heck of it.

 

Do you see the valuation of comps going lower/bids disappearing? That is, is there any urgency to taking action. How would simply sitting on the company until death be inconsistent with maximizing the value of his investment for his family/reputation - his heirs can sell the company then, and his reputation gets burnished as he remains at the tiller of a name-brand investment bank until the end.

 

I think vanity is a unhelpful word to use, but I do think its probable that (1) current management likes the status quo and isn't interested particularly in stepping away and (2) current management doesn't want to report to anyone else after years of independence. So I see zero catalyst to a sale, and in the meantime OPY is clearly not earning its cost of capital (even on the debt side, let alone the cost of equity). I wouldn't quite call it a value trap as I don't think the company is deteriorating over time, but I think current pricing reflects fair value of an independent OPY and the unlikelihood of its independence ending anytime soon.

[Nassau]

Actually, what I see is broad skepticism and negativity, and therefore opportunity for the value investor buying the stock at a significant discount to Tangible Book Value, while collecting a nice 1.8% dividend.

 

Demand for Client Assets never goes away.  Banking, brokerage and asset management are consolidating industries. 

[ratiman]

Do you see the valuation of comps going lower/bids disappearing? That is, is there any urgency to taking action. How would simply sitting on the company until death be inconsistent with maximizing the value of his investment for his family/reputation - his heirs can sell the company then, and his reputation gets burnished as he remains at the tiller of a name-brand investment bank until the end.

 

I think vanity is a unhelpful word to use, but I do think its probable that (1) current management likes the status quo and isn't interested particularly in stepping away and (2) current management doesn't want to report to anyone else after years of independence. So I see zero catalyst to a sale, and in the meantime OPY is clearly not earning its cost of capital (even on the debt side, let alone the cost of equity). I wouldn't quite call it a value trap as I don't think the company is deteriorating over time, but I think current pricing reflects fair value of an independent OPY and the unlikelihood of its independence ending anytime soon.

 

Thanks MS you put it much more succinctly than I did. What I find strange is that none of the comments here or at VIC mention the most massive fact about the company, that Bud is still alive. Judging by the first seven comments on this thread, the company is currently for sale, it's just a matter of the price. Clearly that's not the case.

[ratiman]

It looks like all the VIC buyers who bought on cuyler's say so now have losses. But don't worry, this is worth $60. Cuyler says "I think Stifel is a leading potential buying candidate whenever Lowenthal decides to sell." And that's when exactly? 

[ratiman]

After doing some research on Wikipedia, it looks like Oppenheimer bought the CIBC bank in 2008 for $100M. So this gets even better . . . not only is Bud not going to sell, but judging by recent history, he is eager to reinvest shareholder capital in a bank that by general acknowledgment is vast money pit. And it gets worse! His son is 38 and works in the investment bank. So when Bud retires or dies (whenver that is) his son will take over and dismantle all of his father's hard work, return capital to shareholders, and then put himself out of a job, lol.

 

Seriously, investing takes more than counting. Anybody can count. OPY is a call option with an uncertain exercise date that may or may not pay out. But if you hold it for ten years you might not lose money, that's true. Unless Bud buys another bank.

[Nassau]

After doing some research on Wikipedia,

 

Anyone taking investment advice from people who do "some research on Wikipedia" deserve the losses they will incur.

 

Read the filings, do your own work on the valuation, and invest accordingly.  There are no certainties in life, but there is a certain amount of anger in your tone that indicates you are hoping for a poor outcome.  These are investment guys - they want to make money.  It's that simple.

 

The good news is that we have great protection in tangible book value here, which is well above the current share price, and tangible book has been on an upward slope.

[Homestead31]

whether or not a sale takes place is of course open to debate, and if the entire investment were based on a sale taking place, that would obviously be a speculation.

 

however, a sale would just be an upside case.  there is still significant value just based on industry multiples, and the fact that the company has been dealing with some clear temporary problems helps explain the valuation gap.  you of course can argue that the temporary problems have tarnished the brand to such an extent that it is a melting ice cube, but i see no evidence of that, and think it is not unlikely that the company will trade back toward historical P/TBV values at some point in the coming years.

[ratiman]

whether or not a sale takes place is of course open to debate, and if the entire investment were based on a sale taking place, that would obviously be a speculation.

 

however, a sale would just be an upside case.  there is still significant value just based on industry multiples, and the fact that the company has been dealing with some clear temporary problems helps explain the valuation gap.  you of course can argue that the temporary problems have tarnished the brand to such an extent that it is a melting ice cube, but i see no evidence of that, and think it is not unlikely that the company will trade back toward historical P/TBV values at some point in the coming years.

 

Thanks for your thoughtful reply. If the divisions were broken out separately, what's the return on the TBV in the bank? Zero to negative, right? Hard to say by eyeballing it, but the profits come from the FA and AM divisions. So if the profits get reinvested in the bank - and to date they have been - then the return on reinvested capital will also be zero. Bud Lowenthal explains the valuation gap, as I see it. It's not that OPY is a melting ice cube, it's just growing at a glacial pace and will be for the duration. That's why it's not accorded a valuation in line with peers.