Why Houlihan Lokey (HLI) is Poised to Beat Earnings Estimates Again

In the volatile world of financial services, few firms have demonstrated the resilience and adaptability of Houlihan Lokey (HLI). Despite a challenging macroeconomic environment, the global investment bank has consistently outperformed expectations, a trend that appears set to continue. This article examines why HLI is likely to beat its upcoming earnings estimates, focusing on the Zacks Earnings Surprise Predictor (ESP), recent analyst revisions, and institutional confidence.

The Zacks ESP and the Paradox of Pessimism

The Zacks Earnings ESP for HLI stands at -9.55%, signaling that analysts have recently revised their earnings estimates downward. This negative score typically correlates with a lower probability of beating consensus expectations. However, this metric must be contextualized. The ESP reflects a 3.47% decline in the Zacks Consensus Estimate over the past 30 days, driven by broader market uncertainties and sector-specific headwinds. Yet, HLI's historical performance tells a different story.

HLI has beaten estimates in three of the last four quarters, including an 8.61% surprise in its most recent report. This track record suggests that the company's operational execution and strategic agility often outpace analyst expectations. The negative ESP may thus reflect a lag in analyst sentiment rather than an accurate forecast of HLI's capabilities.

Institutional Confidence: A Contrarian Signal

Institutional ownership of HLI is robust, with 78.07% of shares held by major investors. Recent filings reveal a nuanced picture: while BlackRock and Vanguard have trimmed their stakes, others, including Bogart Wealth LLC and Caitong International Asset Management, have significantly increased their positions. The latter's 3,714.3% surge in holdings underscores a strong vote of confidence in HLI's long-term prospects.

Analysts have also upgraded their outlooks. Keefe, Bruyette & Woods raised its price target from $185 to $232, while Morgan Stanley increased its target to $192. These upgrades, coupled with HLI's 28% year-over-year revenue growth and 21.61% return on equity, highlight the firm's competitive advantages in advisory and capital markets.

Financial Fundamentals: The Bedrock of Outperformance

HLI's recent financial results provide further justification for optimism. The firm reported $1.96 in EPS for the latest quarter, far exceeding the $1.61 consensus estimate. Revenue surged to $666.42 million, a 28% increase year-over-year, driven by strength in its corporate finance and valuation advisory segments. Its 16.73% net margin and consistent dividend growth (up to $0.60 per share) demonstrate disciplined capital allocation and profitability.

These metrics contrast sharply with the negative ESP. While analysts may be cautious about macroeconomic risks, HLI's ability to generate consistent cash flow and adapt to market cycles—such as Fed rate cuts and a resurgence in M&A activity—positions it to outperform.

Reconciling the Divergence

The apparent contradiction between the negative ESP and HLI's strong fundamentals can be explained by two factors. First, the ESP is sensitive to recent estimate revisions, which may not fully capture the firm's operational momentum. Second, institutional investors, particularly those with active management strategies, are betting on HLI's ability to navigate uncertainty. For instance, AQR Capital Management and Centiva Capital have both increased their stakes in 2025, signaling a belief in the firm's undervaluation relative to its earnings potential.

Investment Implications

For investors, the key takeaway is to look beyond the Zacks ESP and Zacks Rank (currently #4, or Sell). While these tools are valuable, they are not infallible. HLI's combination of strong historical performance, robust institutional backing, and improving financials creates a compelling case for earnings outperformance. The firm's exposure to capital markets—set to benefit from Fed rate cuts and a rebound in M&A—further strengthens its outlook.

However, caution is warranted. Insider selling by executives like Chairman Scott Beiser raises questions about internal confidence. Yet, given insiders' 23.68% ownership stake, their actions may reflect portfolio diversification rather than a lack of faith in the company.

Conclusion

Houlihan Lokey stands at a crossroads of skepticism and opportunity. The negative Zacks ESP and weak Zacks Rank may deter short-term investors, but they overlook the firm's operational excellence and institutional conviction. With a history of beating estimates, a resilient business model, and a growing institutional base, HLI is well-positioned to deliver another earnings surprise. For those willing to look beyond the headlines, the firm offers a compelling opportunity to capitalize on its next phase of growth.