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Tickers in this Article: KBW, JPM, EVR, GHL, GS, LAZ
Mergers and acquisitions (M&A) activity in the first half of 2011 hasn't been good, and there's no better example of this than in KBW's (NYSE:KBW) second quarter earnings report. Announced on July 29, it went from a profit of 13 cents, in the second quarter, to a loss of 14 cents. Since announcing dismal results, its stock's have taken a gradual slide from $17.29, the day before reporting, to $14.88 as of October 14, a 15% decline. Year-to-date its stock is down 47% and trades within 15% of its all-time low of $12.48. November, of this year, will mark its fifth anniversary as a public company. It's now or never to own its stock. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The Ugly
Investment banking led the way in the second quarter with revenues of $15.2 million, 75.1% less than the first quarter of 2010 and 59.6% less than the first quarter of 2011. KBW's best year for revenue was 2007 when it generated $427 million. The investment banking revenue in the first quarter, that year, was $67.3 million, 343% higher than in 2011. Overall, revenue in Q2 2007 was $119.8 million, 87% higher than today. Clearly, those were better times for the company and the country. In terms of earnings, the second quarter of 2007 delivered 33 cents a share, 336% higher than today. There's really no comparison between the two quarters. Its best year, financially, since its IPO in 2006 was not, coincidentally, 2006. While revenues were slightly less than in 2007, earnings were double. It's no surprise then, that it hit its all-time high of $38.59 in February 2007. The bet here is that it gets back to those lofty numbers in the next 12 to 18 months.

The Bad
When KBW went public, its directors and officers owned 29% of its stock. As of April 18, 2011, insider ownership dropped to 6.7%, and there's been no insider buying to speak of since director Christopher Condron bought 2,500 shares in February. That's never an encouraging sign. Nor is the share repurchase program it's currently undertaking. Companies are notorious for overpaying for their stock, and KBW's no different. In the second quarter, it repurchased 1.14 million shares of its stock at an average price of $20.94 a share. While hindsight is 20/20, if it had saved the cash for the third quarter, it could have bought back 49% more shares for the same amount. Let's hope it's been buying these past few weeks as its share price deteriorated.

The Good
At the top of this list are principal transactions, the trades it does for its own account. In the second quarter, they improved 264% year-over-year to $12 million and commission revenue was down, only marginally, to $32.2 million from $36.1 million in Q2 2010. It really seems as though its poor performance is all about its M&A business, which management believes will pick up as more companies require capital to expand. KBW isn't the only investment banker struggling with lower fees. JP Morgan (NYSE:JPM) recently suggested its third quarter investment banking fees will be one-third lower at $1 billion. In addition, independent boutiques like Evercore Partners (NYSE:EVR) and Greenhill & Co. (NYSE:GHL) are taking business from Lazard (NYSE:LAZ) and Rothchild, the more established independent advisers. Goldman Sachs (NYSE:GS) isn't worried, just yet, but it's definitely something for KBW to be aware of.

The Bottom Line
KBW is not a stock I'd recommend to my mother-in-law. It has many questions that need answering. Unfortunately, most of these answers won't come for several quarters. However, if you can live with the uncertainty, now is the time to buy before all is well and good again. (For additional reading, see Peer Comparison Uncovers Undervalued Stocks.)

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