Houlihan Lokey, Inc. HLI

The business

Houlihan Lokey sells advice, not capital. Three desks: corporate finance advises companies buying and selling each other, restructuring guides broke companies and their lenders through bankruptcy and workouts, and the valuation group writes the fairness and solvency opinions that deals require. The firm ranks first or near-first by deal count in the mid-market, where each fee is smaller than a megadeal but far more numerous and far steadier. It carries almost no debt, holds about $12 a share in cash, and turns nearly all its profit to cash because there is no factory to feed. The moat is density: 2,800 bankers with more mid-market relationships than anyone, and a restructuring practice that is the first call when credit turns. What the customer holds is a signed engagement letter and, at the close, a fairness opinion no board signs a deal without.

The numbers

The five-quarter sequence tells the whole tension: a business climbing to a record, then rolling over in the most recent print.

Revenue peaked in the December quarter at $717 million, then stepped down two quarters straight to $511 million, the June quarter that ended down 16% against the year before and 22% below the prior quarter's earnings. The September quarter that would show whether June was temporary or the cycle rolling over has not yet printed, so the only hard read since remains June itself, and June was soft.

The full years say the opposite of one bad quarter.

From the FY2023 deal-drought trough, revenue compounded 13.1% and diluted earnings 18.3% over three years, with the share count up only 1.3% as buybacks roughly offset stock pay that runs 8% of revenue, a real and recurring cost. Free cash reached about $10 a share last year. At 23 times earnings with a 1.9% dividend, the return math works if mid-teens through-cycle growth holds. What the memo believes that the tape does not: the market is pricing June as the whole firm rolling over, when the restructuring leg is built to carry more load than one soft M&A quarter implies. The September segment split settles it.

The valuation cycle is the lens that matters here.

The multiple compressed from the low-30s to 24x while earnings hit a record. The one caveat: 2022's 14x sat on the last cyclical peak in profit, so a low multiple then was a warning, not a bargain.

Management

The record over the last year is that insiders were net sellers, about $2.8 million out against a single open-market purchase of roughly $500,000, the one buy the bullish case leans on because it came from someone who watches the pipeline daily. The five sells, led by a $1.4 million transaction and the co-chairman's $0.9 million, read as ordinary diversification, none flagged as forced. CEO pay ran about $11 million, almost entirely incentive-based and about 2.8% of profit, which is restrained for the seat. Buybacks stepped up to $175 million last year at an average $150, a touch above today's price, so the recent repurchase is modestly underwater while the heavy FY2022 buying at $89 aged well. Capital return is disciplined, not brilliant.

How it fails or surprises you

The deal cycle has turned, not paused. June revenue fell 16% to $511 million and diluted EPS 19% to $1.15, the softest quarter in over a year. If corporate finance backlog is draining rather than pausing, FY2027 earnings fall and 23 times on shrinking EPS quietly becomes 28 times. The print that shows it first: September revenue and the corporate finance line.

The record year was the peak. FY2026 booked record revenue of $2.62 billion, yet the very next quarter dropped 16%. Both cannot be the trend. If the record marked the cyclical top, then 23 times sits on peak earnings, and peak multiples on advisory firms compress fast. What proves the read wrong: two more quarters below $600 million.

Restructuring catches what M&A drops (right tail). Houlihan runs one of the country's top restructuring desks, and it works the opposite cycle: rising corporate distress feeds mandates exactly as M&A fees fade. The market is extrapolating soft June across all three legs at once. Not priced today. The print: restructuring revenue re-accelerating while corporate finance stays soft.

Closing thoughts

This is an uncertainty a named print resolves, and the print is the September quarter. If it shows corporate finance steady and restructuring building, June was a pothole and 24x on a record-earning franchise is the cheapest this name has offered since the recovery began. If September brings a second sub-$600 million quarter, the read flips: the tape was right, the record year was the top, and the multiple is resting on earnings that are already receding. The left tail is a full-firm cyclical downturn that no single desk offsets, and it is the one worth naming early. The fatter tail, on judgment not arithmetic, is the middle: a cyclical business caught mid-air, priced for neither the recovery nor the top.

The bet stays what it was: companies keep hiring Houlihan to buy, sell, and rescue each other, and the three desks keep covering for one another when any one goes quiet. What breaks it is the restructuring leg failing to catch a real M&A slowdown, and the pair that tells you first is September's corporate finance revenue against its restructuring revenue. It is falsified the day distress rises and the restructuring line does not.