Houlihan Lokey slides 6.5% despite earnings beat
Margin concerns and lack of guidance overshadow strong Q3 revenue growth across all segments
Houlihan Lokey shares fell 6.5% to $168.81 on Thursday, extending a two-day decline despite the investment banking firm reporting better-than-expected quarterly results. The delayed selloff followed January 28 earnings that beat analyst estimates but raised concerns about rising compensation costs and the absence of formal guidance.
The Los Angeles-based firm reported fiscal third quarter revenue of $717.1 million, surpassing analyst expectations of $708.3 million and representing 13% growth year-over-year. Adjusted earnings per share reached $1.94, beating estimates of $1.89.
All three business segments posted growth, with Corporate Finance revenue increasing 12% to $474 million, Financial Restructuring climbing 19% to $156 million, and Financial and Valuation Advisory rising 6% to $87 million.
However, investors focused on margin deterioration, as the GAAP compensation ratio increased to 64.0% from 63.5% in the prior-year quarter. Compensation expenses surged to $459 million from $403 million a year earlier, attributed primarily to higher revenue driving increased compensation obligations. The adjusted compensation ratio remained flat at 61.5%, but the GAAP uptick signaled pressure on profitability.
The company reported GAAP diluted EPS of $1.70, with net margin at 16.6% and operating margin at 23.6%. Non-compensation expenses increased on an adjusted basis to $94 million from $83 million, driven by higher information technology costs and professional fees.
Management's decision not to provide formal forward guidance also weighed on investor sentiment, though CEO Scott Adelson offered an optimistic outlook on the mergers and acquisitions landscape during the earnings call. "M&A activity is absolutely increasing. And even more so on the private equity side than we have seen in recent history, and we expect that to continue," Adelson told analysts.
Adelson described the current M&A cycle as being in the "third inning," indicating significant remaining upside due to pent-up demand. He noted that while large-cap M&A has rebounded faster, Houlihan Lokey remains focused on capturing market share in the middle market regardless of broader market fluctuations.
The company bolstered its European presence during the quarter, completing the acquisition of Mellon Capital Real Estate Advisory and announcing a controlling interest in O'Dare Partners. Management emphasized European expansion as a longer-term objective to match Corporate Finance scale in the region to its U.S. operations.
Houlihan Lokey's balance sheet remains robust, with $1.18 billion in unrestricted cash and investment securities as of December 31, 2025. The Board of Directors declared a quarterly dividend of $0.60 per share, payable March 15. CFO Lindsey Alley indicated the company prefers deploying excess cash toward acquisitions, with share repurchases as a secondary option.
Despite the post-earnings decline, analysts remain largely bullish on the shares. Five analysts have issued price targets in recent months, with a median target of $215—well above the current share price. Morgan Stanley maintains an Overweight rating with a $215 target, while BMO Capital has an Outperform rating and $230 price objective.
The stock's decline represents a 20% drop from its 52-week high of $211.05 reached earlier this year, despite the company delivering 19% quarterly earnings growth and 14% revenue growth year-over-year. The firm now trades at 28.9 times trailing earnings, with a forward price-to-earnings multiple of 20.7 times.