This week we had the opportunity to spend time with a number of management teams which hosted sell side dinners this week including AMTD, LPLA, ETFC. These dinners are always quite informative and in this Week’s Chu we summarize the two biggest takeaways from each of the dinners (Slides 4-5). For AMTD we would be mindful of potential changes on the BDA front which could be a huge source of EPS uplift. While these changes could be announced mid-2021, they would not go into effect until 2023.
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Merger model outlining accretion potential and other calculations for various eBroker / Universal Broker combinations with E*TRADE.
There really is no rest for the weary, as we jumped straight from earnings season to conference season. There were a number of company presentations this week across several conferences, but the one that prompted the most inbound was that from US Consumer Bank CEO, Anand Selva. This week we dig a little deeper into some of the presentation disclosures – the slide deck was chock full of good data, but it also prompted a number of questions regarding lack of efficiency improvement and how Citi might look to close the gap versus peers. We also revisited GS and questions around the firm’s ability to lower its efficiency to <60% following Steven Scherr’s presentation and unveiling of the official Investor Day date (January 29th, 2020). One company presentation that did prompt significant inbound but we did not touch in our Weekly was MS’ Head of Investment Management, Dan Simkowitz.
This week we provided some detailed feedback following marketing in Europe, highlighting some of the most heavily debated stocks in our coverage and key themes across subsectors.
3Q19: Core Miss on Higher Expenses; Advisory Fees Miss vs. Cons. LAZ reported 3Q19 adjusted EPS of $0.76, but excluding a lower effective tax rate (~17%), we estimate core EPS closer to $0.68, slightly below our $0.69 and cons of $0.73. Versus our estimate, core miss was driven by higher expenses, particularly noncomp (-$0.05) and slightly lower Asset Management fees (-$0.01), partially offset by better Financial Advisory (+$0.04) which came in above our estimate but below street expectations. See pg. 2 for our detailed variance sheet. Bottom line: Details on business restructuring / realignment were somewhat vague in the release, so management messaging on the call on how this will impact revenues / earnings will be key driver of share performance. While outlook / commentary on advisory into year-end is positive (supported by Dealogic data suggesting LAZ backlog up +14% YoY vs. -8% industry), AM flows remain challenged and could dampen optimism.
3Q Beat on Better IB, FICC; though Sustainability of Revenue Strength Will Be Key Focus Area. SF reported 3Q19 adjusted EPS of $1.50, above both our $1.41 and cons. of $1.47. Versus our estimate, the beat was primarily driven by higher revenues (+$0.14), notably better IB and trading, partially offset by higher expenses due to elevated comp (-$0.05). See detailed variance on pg. 3. Bottom line: Headline beat and EPS run rating at $1.50 is a pretty good outcome, and in a tough quarter, revenue momentum both QoQ and YoY was encouraging. That said, revenue beat was driven by areas which are less recurring and therefore arguably lower quality (IB, FICC), with consensus bar for 2020 also somewhat elevated. Given undemanding valuation (9.4x NTM EPS vs. 3-yr. avg. of ~12x), we still see compelling risk / reward longer-term, but sources of revenue beat in 3Q and higher comp may give some investors pause.
This week was pretty interesting in terms of the price action. The worst performing subsector since earnings has been the M&A independents, with EVR missing on 3Q by a wide margin, prompting concerns on Lazard which is slated to reporting this week. We’ve been getting a lot of questions on how we’re thinking about the outlook for M&A heading into a 2020 election year – in response, we conducted a deep dive updating our proprietary M&A fee pool analysis which marries top-down industry fee pool forecasts with bottom-up market share analysis, while also handicapping risk of larger deal activity ($5bn+) which typically slows during periods of heightened economic / political uncertainty. Our findings surprised even us and indicate meaningful differences in our proprietary model forecasts for 2020/2021 and current consensus.
LPLA reported 3Q19 of $1.71 (ex. amortization), vs. our est. (and cons.) of $1.61. Beat was primarily driven by higher cash and transaction fees and lower core G&A. See Ex. 13 for variance. Bottom line: 3Q highlighted improving core trends, including strong organic asset growth (annualized NNA of ~4%), recruiting momentum, cash growth, and improving EBITDA margin. While some bears were focused on commentary suggesting expense growth could be higher in 2020, we are less concerned here as we believe these investments should be accretive to the franchise longer-term, with our updated forecasts still implying upside vs. current cons. expectations. We would also note that fee commentary was very encouraging; LPLA shares have underperformed in recent weeks (>700bps U/P vs. S&P Fins. since eBroker price cuts) given concerns that pricing pressures could have a meaningful impact on earnings.
RJF reported adjusted FY4Q19 EPS of $2.00, above our $1.94 and cons. of $1.91. Vs. our estimate, beat was driven by PE gains (+$0.05), higher Asset Mgmt. / Brokerage fees (+$0.03), better NII (+$0.02), as well as lower comp (+$0.07), partially offset by higher non-comp (-$0.08) and lower IB (-$0.03). See pg. 2 for variance. Bottom Line: RJF had a strong finish to FY19 with record quarterly revenues across all four segments supported by record AUM / loans. While the adjusted non-comps (ex GW impairment) were a bit elevated, these results are tough to fault, with outlook commentary also positive including a strong backlog for IB, FA recruiting. Barring any cautious guidance on the call, we expect shares to outperform, with cons. likely heading higher.
NTRS reported 3Q19 EPS of $1.69, ahead of our estimate of $1.65 and cons. of $1.64. Versus our forecast, the beat was driven primarily by stronger NII (+$0.01), higher fee income (+$0.02), lower provision (+$0.03), and good expense control (+$0.03), partially offset by a higher tax rate (-$0.04) and sharecount (-$0.01). See pg. 2 for detailed variance. Bottom Line: 3Q beat reflected broad-based strength but following strong prints at Trust peers we believe expectations were fairly high, with some sources of disappointment, notably weaker deposit trends (flat QoQ) and less resilient NII versus peers.
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