Since its November IPO, KBW's (NYSE:KBW) stock has been red hot, going from $21.00 to $36.35. The market environment for investment banks -- including the likes of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) -- is seemingly perfect. The big issue is whether KBW's valuation is too frothy for investors.
In the fiscal fourth quarter, revenues increased 32% to $120.2 million and earnings surged from $7.3 million, or $0.26 per share, to $25.4 million, or $0.87 per share. Of course, the big driver for KBW is the investment banking unit, where revenues rose 69% to $67.2 million. The breakdown: $19.1 million for underwritings (such as IPOs), $19.4 million in private placements, and $28.7 million for advising on mergers and acquisitions.
But dealmaking is not just a U.S. phenomenon. Europe is also seeing lots of deal activity, and the good news is that KBW has been building out its platform in the region.
Valuation concerns
KBW provides investment banking services -- like M&A advising and IPOs -- primarily for the financial services industry. The firm also has asset management, trading, and a well-regarded research team.
Like peers Greenhill (NYSE:GHL) and Lazard (NYSE:LAZ), KBW is selling at a hefty valuation (28 times earnings). Investors have become accustomed to strong growth from this group and that has placed premiums on the stocks.
However, even in a strong market, investment banks can stumble. All it takes is failing to snag a couple major clients, which may explain why KBW does not provide revenue and earnings guidance.
It is also worrisome that KBW issued only 6.8 million shares in its IPO; that makes for a fairly small float, which means it is easier for traders to move the stock. Just look at yesterday's performance, in which KBW's stock soared 14.31% on volume of only 694,700 shares.
There's no doubt that KBW has a strong investment-banking franchise and a profitable structure, but it also comes at a high price, and with a good amount of risk.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
