Goldman Bullish on LPL Stock, Bearish on Stifel
Goldman Sachs analysts on Monday upgraded shares of LPL Financial to “buy,” saying the firm’s capital-light operating model and reduced debt burden position it for a 19% jump in profits this year and the likelihood of share buybacks.
They underscored their endorsement by putting the biggest independent brokerage firm on their “conviction buy list,” a rarefied endorsement category unique to Goldman. At the same time, they lowered their signal on Stifel Financial to “neutral” from the “buy” they flashed a year ago. The St. Louis-based firm’s shares are no longer a bargain relative to LPL and Raymond James Financial, the analysts wrote.
Shares of LPL jumped 1.7% in morning trading on the recommendation, while those of Stifel were off 1.1% amid a general rise in U.S. stocks overall. Raymond James, which the analysts keep at neutral, was up 0.28%.
“Many of the headwinds LPLA faced in 2016 (debt covenant constraints, low interest rates, asset-based free pressure preDOL) have now become tailwinds and we think the leverage to these drivers is under-appreciated,” Goldman brokerage analyst Conor Fitzgerald wrote in his report, using LPL’s ticker symbol.
The firm, which works with more than 14,000 independent brokers, is better positioned than Stifel and Raymond James to take advantage of rising rates because it significantly lowered its own debt through a refinancing this year, he wrote. A 1% lift in rates by the Federal Reserve this year should improve LPL’s earnings by 32%, almost twice that of the two publicly traded full-service competitors he follows that, unlike LPL, also run investment banking and trading businesses.
LPL and other independent broker-dealers historically derived a large part of their revenue from high-commission products such as privately traded real estate investment trusts, limited partnerships and annuities. Sales of such products have been slowed by product changes firms have made in anticipation of the Department of Labor’s fiduciary rule for retirement products, but Fitzgerald said all brokerage firms may paradoxically get a profitability benefit from the DOL rule because of more profitable contracts with fund providers.
“[W]e believe renegotiations with asset managers ahead of the (now delayed) DOL rule may have resulted in improved economics for the brokers,” the report said, “something which yet to fully reflected in LPLA or peers’ financials.”
Goldman removed Stifel from its buy list because the broker-dealers’ shares have risen 42% since being recommended on January 12, 2016 while those of LPL and Raymond James rose an average of 29% since then. Stifel shares had been trading at 9.4 times analysts’ consensus 2016 earnings— 1.4 times cheaper than Raymond James—when Goldman made its buy call. Today, Stifel’s price-to-2018 earnings ratio of 13.7 is relatively flat with 13.8 for LPL and for Raymond James, the Goldman analysts said.