With news flow a bit quieter this week and our buy side counterparts still digesting some remaining prints, we took the opportunity ahead of our upcoming Wolfe FinTech Forum (March 10th – 11th) to put together tearsheets for all of our participating companies, including synopses of the c-suite presenters, business / performance trends, key areas of investor debate, and what we aim to learn from each session. We didn’t intend for things to work out this way, but we will be hosting 1v1 (signup here) and group meetings with eight firms representing ~25% of the $45 trillion US Retail / Wealth Management TAM (BAC, UBS, MS, GS, RJF, LPLA, ETFC and SF). That’s to say the conference will be an excellent one-stop shop for those looking to dig into the competitive dynamics of the space and drill down on topics such as FA recruiting / breakaway brokers, pricing and rate sensitivity.
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Tougher Scenarios for Brokers (GS, MS) and Card Issuers (C, COF) on More Severe Credit Selloff, CLO Stress, and Jump in Unemployment. The Fed published its assumptions for 2020 CCAR scenarios after the market close. For this year’s Severely Adverse scenario (which dictates capital targets for individual banks), the Fed contemplates a more a more pronounced spike in the unemployment rate, a severe credit market selloff (negative for GS, MS), and higher stress on CLO and PE exposures in the Global Market Shock (negative for WFC, GS). Otherwise, the test appears in-line to less severe relative to prior cycles, including a less severe rate / OCI shock and curve steepening (positive for Trusts, BAC). The Fed did highlight a more cautious view on international (both Developing Asia and EM), which coupled with a higher spike in unemployment (implying higher Card losses), may pose a greater threat to Citi (Ex. 7).
SCHW refreshed its 2020 Outlook and long-term growth targets as part of its Winter Business Update. To us, the day’s presentations confirmed 2020 as being somewhat of a transition year, including expectations for negative operating leverage as a result of commission & rate cut headwinds + USAA integration spend. Based on various guidance items (outlined on pg. 3) we peg the midpoint of 2020 guidance at $2.57 in EPS – roughly 2% below consensus. Our refreshed estimates saw 2020E EPS come down by 3% as rate pressures and more moderated buyback expectations more than offset higher client cash balances (given favorable cash sorting commentary). Bottom line: Since SCHW announced its highly accretive acquisition of AMTD, its shares have underperformed the market and S&P FINS by 900/300bps, respectively, with a deteriorating rate backdrop the main driver.
49ers or the Chiefs? I’m a firm believer in the tried and true mantra of offense wins games, defense wins championships, and am leaning towards the 49ers here though don’t have strong allegiance to either team. Admittedly I will be much more focused on the scoring as I just received my boxes for the game – this year serves as a healthy reminder for why I should stop participating in such activities (2 & 2… remember that time a team scored 4 field goals and the other had a safety, and that was the extent of the scoring? Yea me neither).
LPLA reported 4Q19 EPS of $1.68 (ex. intangibles) vs. our estimate of $1.61 and cons. of $1.59. Vs. our forecasts, beat was primarily driven by better cash growth and NNA, partially offset by modestly higher core G&A (see page 2 for variance). More importantly, LPLA provided updated Core G&A guide for 2020 ($915-940mn, or +7% YoY growth, vs. cons. $911mn) which was a sticking point for some investors. Bottom line: Shares have been a bit weak heading into earnings following disappointing expense growth guidance from Retail Broker peers (down -2% since RJF earnings, vs. -1% S&P Fins.), so we would argue this was already somewhat expected. We believe strong growth in NNA (+5% organic growth in 4Q), cash (+8% QoQ), and recruiting momentum (recruited assets of $35bn in 2019, +28% YoY) are more important, and signal that momentum in the business continues to improve as investments bear fruit.
Why did the stock jump +10% on earnings? We attribute the bounce to 2 main reasons: 1) revenue/EPS upside for a stock that had seen a wave of negative revisions and lagged materially (-700bps YTD vs. peers into print) on visible completions for 4Q that looked uncharacteristically weak; and 2) the completely unforeseen Rx program to cut headcount and optimize investment spend which deflated the bear thesis that had been percolating around weaker SMD productivity and downward pressure on op margins (also part of our downgrade to Peer Perform earlier this year). Constructive outlook commentary from management (including advisory pipeline strength) and implied cost savings from the realignment initiative did, in fact, pose upside risk vs. our estimates. We took our street-low 2020E/2021E EPS up by 13%/12%, respectively, and are now 4%/3% below consensus for both years. With the stock now having moved higher, we still find the (relative) valuation attractive with shares at <10x 2021E EPS but are not inclined to lean in here with the consensus revenue/earnings bar still high: excluding our estimates, the street has 2021 revenues/EPS +8%/+2% vs. 2018’s blockbuster results. PT increases to $89 (from $83) and maintain Peer Perform.
SF reported 4Q19 earnings this morning (01/30/20), with results representing a strong beat vs. both our forecasts and cons. (see first look). Shares outperformed following the print, up +4% (vs. flat S&P Fins.) as of this writing, consistent with upside to cons. as implied by 2020 guidance. Despite strong O/P YTD (+7%, vs. S&P Fins. -2%) we believe risk / reward remains attractive with shares at <10x NTM EPS, a 2-3 turn discount vs. Regional Broker peers, and >3-turns vs. history. Given strong EPS momentum and greater confidence in 2020 outlook, we see favorable risk / reward here. We raised our forecasts which are +4-5% above cons., and more aligned with 2020 Outlook guidance (see below), with our PT increasing to $82 (from $73). Maintain Outperform.
The strength was driven by better topline (+$0.11), balanced across Financial Advisory and Asset Management. Non-comps also came in slightly better than our forecast (+$0.04), which was partially offset by modestly higher sharecount (-$0.01) and drag from minorities / other (-$0.04). Bottom Line: LAZ results impressed as flow trends have started to improve (and turned positive for the quarter), Advisory momentum appears slated to continue, and non-comps were also well managed while still funding ongoing investments in the business. As noted in our 2020 Outlook, we are seeing signs of revenue inflection with higher AUM (EOP) and Advisory momentum supporting upward revisions. While shares have been strong out of the gate in 2020 (+7%, vs. S&P Fins. -2%) we believe these results are good enough to drive continued share momentum.
GS hosted its first ever Investor Day today and shares underperformed the tape (-1% vs. flat S&P Fins.) as a result of perceived reliance on revenue growth to support intermediate and long-term targets – however, we are much more constructive as the bulk of the earnings upside / path to mid-teens ROTE stems from “self-help” initiatives, namely efficiency improvement and funding optimization (Page 3). Bottom line: Despite investor skepticism on revenue growth targets (particularly in growth initiatives e.g., Alternatives, Transaction Banking, and Consumer), near-term efficiency improvement alone should support 10% upside to cons. Meanwhile, a clearer path to mid-teens ROTE (Ex. 1-2) that’s largely self-help reliant (>70% of targeted improvement) should boost the stock’s valuation over the intermediate term.
Investor Day Slides Outline Path to ~60% Efficiency; Mid-Teens ROTCE. GS is hosting its first ever Investor Day today. In the slide presentation (published earlier this morning), the firm outlines a five-year ROTE target of mid-teens or better. In addition, GS also gave intermediate targets (3 years), including ~60% efficiency, >14% ROTE, and 13-13.5% CET1. Bottom line: In a recent Bull / Bear lunch we hosted, the key concern cited among investors was that GS would disappoint by not providing intermediate targets (as longer-term targets are tougher to underwrite). This presentation should dispel such concerns, particularly as near-term targets support 10% upside to cons. Despite strong performance YTD (+6% vs. S&P Fins. -2%) and a raised bar heading into Investor Day, we believe these targets should be sufficient to drive further outperformance. We will follow up with more detailed thoughts this evening post the event. Maintain O/P, with our first blush reinforcing GS as one of our Top Picks for 2020.
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