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Stock Spotlight

LPL pushes its lead on the pack

 
Recent Price
$85
 
Dividend
$1.00
 
Yield
1.2%
 
P/E Ratio
14
 
Shares (millions)
87
 
Long-Term Debt as % of Capital
72%
 
52-Week Price Range
$86.09 - $52.03

The largest independent broker-dealer in the U.S., LPL Financial ($85; LPLA) is an outlier among investment banking and brokerage stocks in the S&P 1500 Index. Including dividends, LPL shares have returned 18% over the past 12 months, while the average stock in its industry has retreated 19%.

LPL’s share-price action has benefited from the stock market’s rally and its own impressive operating momentum. Per-share profits jumped 84% on 19% higher sales in the 12 months ended March, exceeding its industry’s average growth of 22% for profits and 11% for revenue. LPL’s operating cash flow nearly doubled in the past year, and free cash flow more than tripled to $412 million.

The stock also stands out in our research universe, earning above average ranks for all six Quadrix® categories, contributing to an Overall score of 97. LPL Financial, yielding 1.2%, is a Long-Term Buy.

Assessing LPL’s risk profile

LPL offers research and compliance services to independent financial advisers, banks, and credit unions. Its brokerage business also gives advisers access to a roster of mutual funds, annuities, insurance, and alternative investments they can sell to clients. Most of its advisers are based in rural and suburban areas.

LPL faces two primary risks, both outside of its control: a stock-market downturn and lower interest rates. On the first count, LPL has withstood the market’s recent softness, rallying 6% since the end of April.

As for interest rates, the Federal Reserve maintained the federal funds rate in June but signaled it may cut rates later this year if the U.S. economy weakens. LPL CFO Matthew Audette has said, “There’s no getting around the level of interest rates. When they’re low, it’s tough.”

Brokerage firms such as LPL use sweep programs, temporarily moving idle cash in client accounts into money-market funds. These companies often pass on a portion of the earned interest to clients, while keeping the rest for themselves. The prospect of falling interest rates threatens to constrict a reliable profit stream for LPL.

To reduce its sensitivity to interest rates, LPL has been moving its sweeps portfolio into fixed rates from floating rates. About 40% of that portfolio is currently in fixed rates, up from 10% in the September quarter. LPL ultimately plans to move 50% to 75% of balances to fixed rates by next year. So far, management estimates these moves have reduced annual costs from a rate cut to about $15 million from $35 million.

Conclusion

Analyst estimates for the June quarter have marched higher over the past 90 days, with the consensus now projecting earnings per share of $1.75, up 35%, on revenue of $1.4 billion, up 8%. For the full year, LPL is expected to grow profits 46% on 9% higher sales. That compares to its industry’s average expected growth of 5% for profits and 3% for revenue.

Despite its superior share-price action and operating momentum, LPL has a trailing P/E ratio of 13, 5% below its industry average.

LPL Financial Holdings Inc., 75 State St., Boston, MA 02109, (617) 423-3644, www.lpl.com.

 

 
Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio Range
Mar '19 $1.79 vs. 1.01 10% $79.34 - $59.48 16 - 12
Dec '18 1.36 vs. 0.69 18% 66.33 - 52.03 16 - 12
Sep '18 1.19 vs. 0.63 25% 71.46 - 63.31 20 - 17
Jun '18 1.30 vs. 0.74 22% 73.28 - 56.31 24 - 18

 
Year (Dec.) Sales (Bil.) Per-Share Earnings* Per-Share Dividend 52-Week Price Range P/E Ratio Range
2018 $5.2 $4.85 $1.00 $73.28 - $52.03 15 - 11
2017 4.3 2.59 1.00 57.90 - 35.23 22 - 14
2016 4.0 2.13 1.00 43.89 - 15.38 21 - 7
2015 4.3 1.74 1.00 48.18 - 36.41 28 - 21

 
Quadrix Scores
Overall Momentum Value Quality Financial Strength Earnings Estimates Performance
97 99 73 92 56 75 69

* Earnings exclude special items.
NA Not Available.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.


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Stock Spotlight

LPL pushes its lead on the pack

Wednesday, July 17, 2019

The largest independent broker-dealer in the U.S., LPL Financial ($85; LPLA) is an outlier among investment banking and brokerage stocks in the...

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