Goldman upgrades Moelis stock on M&A Outlook © Reuters.

On Wednesday, Goldman Sachs adjusted its stance on Moelis (NYSE:) & Company stock (NYSE:MC), elevating the investment bank’s rating to Neutral from Sell. Accompanying the upgrade, the firm also increased the price target to $58 from the previous $53. This change reflects a potential 13% total return, factoring in Moelis’ 4.5% dividend yield.

The reassessment comes after Moelis experienced a modest decline of approximately 2% following its fourth-quarter 2023 earnings report, contrasting with a 6% gain seen by its peers. Since Moelis was added to Goldman Sachs’ Sell List on January 10, 2023, the company’s shares have lagged behind both its advisory and investment banking counterparts and the broader by 10 and 9 percentage points, respectively.

Goldman Sachs’ revised outlook is based on the anticipation of an upturn in the mergers and acquisitions (M&A) cycle, which is expected to favor Moelis due to its leading revenue growth driven by strong backlogs, strategic hiring, and investments in technology sector M&A.

The firm also recognizes Moelis’ potential for margin expansion, as it aims to reverse recent operating leverage trends that were less favorable compared to peers, particularly as it moves beyond significant fixed compensation increases incurred in 2023 due to hiring efforts.

Additionally, the perceived risk of a dividend cut for Moelis, which had been a concern in recent quarters, is now viewed as minimal. While Moelis’ valuation on absolute terms is above the industry average, it remains below its historical peak price-to-earnings (P/E) ratios. Historically, Moelis has shown a tendency to outperform early in the economic cycle, benefiting from a re-rating to peak multiples as earnings growth accelerates, a trend Goldman Sachs believes is likely to repeat in the current cycle.

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