This week our WR Banks & Brokers Index was down -1% WoW, lagging the S&P 500 and S&P Fins. by 100bps. C (+3%) and BAC (+2%) were our relative outperformers, with Citi benefitting from WoW estimate revisions (+1%). STT (-2%) saw estimates revise down by -3% following guidance on NII, and it joins the eBrokers (-3%) as our relative laggards following disappointing monthly metrics. LPLA (+37%), SF (+37%), and C (+30%) continue to outperform the rest of our coverage YTD, while STT (-12%), LAZ (-9%), and BK (-5%) remain our worst performers.
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We recently hosted meetings with SF CEO Ron Kruszewski, CFO Jim Marischen, and Head of IR Joel Jeffrey. Topics of discussion focused on macro outlook (particularly rates), positioning within Institutional / Wealth Management, expense flexibility, and capital management priorities. Bottom line: Despite an elevated cons. bar following strong YTD revisions (+13% for 2020), we came away from our meeting more constructive on SF shares as management was confident in its ability to defend their operating margin even in the face rate pressures, with stronger recruitment and healthy IB backlogs supporting a higher target multiple. And while shares have meaningfully outperformed YTD (+37%, vs. S&P Fins. +14%), with shares trading near post-crisis trough and a discount vs. both the market and peers, we see compelling risk / reward. Our PT of $65 implies +15% upside; Maintain Outperform.
This week our WR Banks & Brokers Index was up 5% WoW, offsetting last week’s decline of -5%, and outperformed the S&P 500 and S&P Fins. by 100bps. EVR (+14%) and LAZ (+10%) were relative outperformers, while we expect this trend within our coverage to continue for EVR, we do not have the same view on LAZ, which has garnered interesting feedback that we address on slide 4. Our relative underperformers this week were RJF (+1) and STT (+2%); we were surprised by the recent underperformance at RJF and go into further detail on slide 6. YTD performance ranking among the top three remained unchanged with LPLA (+37%) closely followed by SF (+36%), and C (+26%). LAZ benefited from a strong week but still remains in our bottom three per YTD performance (-7%), nestled in between STT (-10%) and BK (-6%).
We have been cautious on the M&A Independents since our launch (see note) as outsized EPS risk and a shrinking M&A fee pool kept us on the sidelines. With EVR / LAZ shares down -24% since our Sept. launch (vs. S&P Fins. -5%), risk / reward has become more balanced, prompting our decision to upgrade the group to Market Weight (from Underweight). This decision is exclusively driven by our more bullish view on EVR which we also upgrade to OP (from PP) reflecting strong market share gains / expectations for upward revisions to cons. (we are +9% above for ‘20). This is in stark contrast to our cautious view on LAZ where weaker backlog trends and negative revision risk affirm our UP rating. Raising EVR PT to $114, with +35% upside supporting our upgrade to OP. Key points anchoring bull case:
This week our WR Banks & Brokers Index was down -5% WoW, lagging the S&P 500 (-3%) and S&P Fins. (-3%). Relative outperformers within our coverage include Citi and JPM which both preformed in line with the broader market (-3%). We explore Citi in greater detail on slide 5 which provides some context on this relative outperformance. The remainder of our coverage underperformed the market by 100-300bps with LAZ, EVR, LPLA, BAC, STT, and BK all at the lower end of the range. YTD trends remained consistent with LPLA maintaining pole position (+31%), followed by SF (+29%) and C (+19%). LAZ (-16%), STT (-12%), and BK (-9%) continue to increase distance from the rest of our coverage and solidify spots as the bottom three relative underperformers.
This week our WR Banks & Brokers Index was down -1% WoW, tracking largely in line with the S&P 500 (-1%) but lagging the S&P Fins. (flat). Relative outperformers within our coverage include LPLA (+5%), which benefited nicely from a strong showing at investor day (see note), as well as RJF (+3%), which likely benefited from the new disclosure provided in April's monthly metrics release (we explore this in greater detail on slide 4). LAZ was the key laggard this week, down (-4%) WoW. Overall, we saw modest reshuffling around the YTD performance league table, with LPLA (+39%) now leading the group followed by SF (+36%) and C (+24%). LAZ (-10%), STT (-7%), and BK (-4%) continue to languish in the bottom three, and given our less constructive 2Q earnings outlooks for each firm, we expect this group to remain the biggest laggards among in coverage.
Ahead of Conference Season, We Updated Our Question Bank for Investors. Conference season is upon us, with a number of upcoming financials conferences over the next several weeks. To help investors prepare for company presentations / 1x1 meetings, we have updated our question bank, with the following pages outlining 10 key questions for each company on a number of key themes.
LPLA hosted its 2019 Investor Day yesterday, with management highlighting opportunities for growth and reinforcing the view that LPLA is no longer a market / rates proxy (Ex. 4-5). We thought mgmt. did an excellent job laying out the building blocks for future earnings growth, including accelerating net new asset (NNA) trends, increased adoption of higher-ROA offerings, commitment to delivering positive operating leverage, and significant capital return through 2020. Putting all the pieces together, our “bull case” earnings analysis supports as much as $9 GAAP EPS by 2020, implying >25% upside to cons. (Page 3). In our view, this was exactly the message management needed to deliver following strong post-earnings stock outperformance to assure investors that earnings growth / share price momentum is sustainable. We raised our 2020E to $8.13 from $7.94 (+7% above cons.), with our PT increasing to street high of $100; maintain Outperform rating.
This week our WR Banks & Brokers Index was down -4% WoW, lagging both the S&P 500 by 300bps and the S&P Fins. by 200bps. AMTD was the relative winner this week, down -1%, with LPLA (-2%), GS (-2%) and JPM (-2%) rounding out the rest of the top relative outperformers, showcasing just how tough this week was in terms of share performance as trade tensions weighed on the space. The M&A boutiques were the weakest performers in our coverage once again as EVR and LAZ were down -9% and -6% WoW, respectively, with STT (-7%) and SCHW (-6%) the other relative laggards. YTD trends remain consistent with last week’s Chu (see report) as our top three performers remain SF (+38%), LPLA (+32%), and C (+25%), with GS (+18%) overtaking EVR (+15%) for the fourth spot. LAZ (-6%), STT (-4%), BK (-2%), and WFC (-1%) are all still in the bottom four.
GS announced its acquisition of United Capital Financial Partners this morning, an RIA with $25bn in AUM and ~220 financial advisors. GS will pay $750mn in cash, with the acquisition expected to close in 3Q19. Bottom line: We believe this deal should ultimately be accretive to GS as it provides natural synergies with the firm’ existing WM capabilities. Looking further down the line, the monetization of client cash / increased deposit gathering also supports key tenets of our bull case; lastly, the FinLife platform (technology platform which is licensed to other RIAs) could also provide an incremental revenue opportunity over time.
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