Boutique investment bank Cowen ( COWN) got a modest boost Tuesday after two Wall Street firms started coverage with buy ratings. Merrill Lynch research analyst Guy Moszkowski started coverage of Cowen with a buy rating, setting a price target of $18 a share. Sandler O'Neill also initiated coverage with a buy rating on the stock. Shares of Cowen rose 13 cents to $14.32. The stock has lost 10% of its value since its initial public offering last month. Cowen priced shares at $16 apiece after setting an expected range of $19 to $21 a share. "Market conditions have driven shares lower from an already low IPO price ... and Cowen is trading at a significant discount to
its competitors," Moszkowski said in the report. "This has provided an attractive entry point, in our view." Cowen's shares are trading at a discount to its competitors, according to Moszkowski's estimates. At Tuesday's price, Cowen shares fetch 12 times next year's estimated earnings. Piper Jaffrey ( PJC) trades at 17.8 times earnings, and Thomas Weisel ( TWPG) is at 12.9 times. But Cowen makes about 50% of its revenue from investment banking services and the other half mostly from sales and trading. The bank mainly advises deals and assists trading in equities, which doesn't bode well if the stock market slows.
"Cowen businesses are heavily driven by equity markets, so it is disproportionately exposed to any market downturn," Moszkowski said in the report. Meanwhile, the firm also earned $17.7 million of its $83.6 million in revenue from private placements -- including assisting PIPEs deals, or private investments in public equity. Cowen's revenue from private placement increased nearly fivefold in the quarter, but as PIPEs deals draw regulatory scrutiny, Cowen's revenue from these deals may be at risk. "PIPEs have begun to draw the attention of regulators concerned about inappropriate use by investors of the information about a coming issue. This is a growing business for Cowen and could be constrained by government regulation/intervention," the report said.