Bank Consolidation And Private Credit Expansion Will Support A Stronger Advisory Franchise

Catalysts

About Piper Sandler Companies

Piper Sandler Companies is a US investment bank that provides advisory, capital markets, public finance and brokerage services across multiple sectors.

What are the underlying business or industry changes driving this perspective?

• Rising consolidation among US banks and related balance sheet restructurings are creating more complex M&A and fixed income assignments. This can support advisory and trading revenues as Piper Sandler advises on both bank deals and associated balance sheet repositioning.
• Ongoing capital needs in health care and biotech, supported by active M&A and large equity and debt financings, are reinforcing demand for sector focused capital markets advice. This can influence corporate financing revenues and fee rates.
• Growth in private credit and sponsor activity is expanding the opportunity set for debt capital markets advisory, private capital advisory and restructuring work. This can affect advisory revenues and support operating leverage as more of the fee pool shifts to these higher value services.
• Continued investment in technology focused banking coverage, including government services, defense technology and artificial intelligence, is broadening the firm’s reach into a large fee pool. This can impact long term advisory and underwriting revenues and help scale earnings.
• Healthy municipal issuance and investor demand for well structured taxable and tax exempt deals, along with a pickup in refundings when clients choose to act, support a larger opportunity set in public finance. This can influence municipal financing revenues and overall margin mix.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Piper Sandler Companies's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.8% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $448.7 million (and earnings per share of $22.56) by about January 2029, up from $236.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.2x on those 2029 earnings, down from 26.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.59%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If equity markets move away from record highs or volatility rises, equity underwriting and IPO activity could slow. This would pressure corporate financing revenues and reduce earnings sensitivity to strong markets.
• Bank M&A and related balance sheet restructurings are an important long-term theme, but they depend heavily on supportive depository stock valuations. Weak bank share prices or periods of investor risk aversion could stall deal flow and reduce advisory revenues and operating margins.
• The build out of technology, government services, defense technology and artificial intelligence coverage requires continued hiring of managing directors and integration of acquisitions. If fee pools or client demand in these sectors soften, higher compensation and occupancy expenses could weigh on net margins.
• Public finance and fixed income activity are closely tied to interest rate trends and yield curve shape. If rate cuts or curve normalization do not materialize as issuers expect, municipal refundings, depository balance sheet repositioning and related trading activity could fall short of current pipelines, limiting revenue growth.
• Non M&A advisory areas such as debt capital markets advisory, private capital advisory and restructuring have been growing from a smaller base. If private equity sponsors slow their use of private credit or secondary transactions, the mix shift toward these higher fee services could reverse, affecting overall revenue diversification and operating leverage.

Stay updated on the most important news stories for Piper Sandler Companies by adding it to your watchlist or portfolio. Alternatively, explore our Community to discover new perspectives on Piper Sandler Companies.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $410.67 for Piper Sandler Companies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $2.5 billion, earnings will come to $448.7 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $356.12, the analyst price target of $410.67 is 13.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.