Houlihan Lokey's Valuation Upgrade Reinforces Buy Case Amid Strong Performance

What happened

Seeking Alpha upgraded Houlihan Lokey's rating, pointing to a more attractive valuation after the stock outperformed the S&P 500. This move follows seven consecutive quarters of earnings beats, fueled by robust growth in the Corporate Finance segment and resilient restructuring revenue. The DeepValue report highlights HLI's FY2025 revenue surge of 24.8% to $2.39 billion, with segments like Corporate Finance up 38% and Financial Restructuring steady. Despite inherent revenue variability from milestone-based fees, the company's balance sheet remains strong with net cash and an undrawn revolver. The current P/E of around 27 is now seen as compelling relative to peers and historical levels, though macro risks linger.

Implication

The rating upgrade signals that HLI's stock could offer further gains if strong segment performance and earnings momentum persist. With a DCF intrinsic value estimate of $390 versus the current $173 price, there is notable upside potential for patient investors. However, the advisory business is highly sensitive to economic cycles, and a downturn in M&A or restructuring volumes could quickly erode earnings. Investors must monitor quarterly segment revenues and franchise rankings, as any slippage could undermine the company's competitive moat. Overall, while the buy thesis is reinforced, diversification is prudent due to the inherent volatility in fee-based revenue models.

Thesis delta

The Seeking Alpha upgrade aligns with our existing BUY thesis, emphasizing that HLI's valuation has improved after sustained operational excellence. However, it does not introduce a major shift, as the DeepValue report already flagged the stock's upside and risks. Investors should view this as confirmation rather than a new catalyst, staying critical of potential over-optimism given the company's exposure to macro headwinds.