EVR reported 4Q EPS of $3.93 earlier today (01/30/19), meaningfully above our estimate of $2.23 and cons. of $2.18 (see published first look) and driving shares up +8.5% on the day (800bps O/P vs. S&P Fins.). In our view, risk / reward for EVR continues to improve, as 4Q results support as much as ~10% upside to cons. and reinforces our preference for EVR vs. LAZ (see 2019 Outlook). However, conversations with investors suggest that the magnitude of 4Q beat actually raised some concerns as to the “forecastability” of EVR revenues given a lack of more detailed disclosures on the contribution from ancillary businesses (i.e., outside of traditional Advisory and Restructuring). The fact that shares outperformed by only 8% also suggests that investors are skeptical of the sustainability of strong 4Q results, as cons. estimate revisions so far have been much stronger (+14%). While EVR has made it clear that such disclosures will not be provided, we sympathize with investors and agree that barring improved transparency on revenues, shares will likely continue to trade at a multiple discount vs. both independent M&A peers and its 5-year average P/E of 15x.
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BAC announced this morning (01/30/19) that it is extending commission-free online stock and ETF trades to all Preferred Rewards program members beginning in 2Q19 (previously available to clients in higher tiers only). The announcement drove eBroker shares down -2% (vs. -50bps S&P Fins.) as investors feared this could drive SCHW or Fidelity to announce commission cuts in retaliation, or otherwise negatively impact market shares across the group. However, we would view this as an attractive buying opportunity as history suggests underperformance should be temporary, with little lasting impacts on market share. This is particularly true for ETFC, as post-earnings share underperformance has continued; we still view risk / reward as compelling as our analysis of high-ROE bank peers suggests ETFC should be trading near ~13.5-14x NTM P/E vs. ~11x currently (Ex. 4).
BAC announced this morning (1/30/19) that it is extending commission-free online stock and ETF trades to all Preferred Rewards program members beginning in 2Q19 (previously available to clients in higher tiers only). The announcement drove eBroker shares down -2% (vs. -50bps S&P Fins.) as investors feared this could drive SCHW or Fidelity to announce commission cuts in retaliation, or otherwise negatively impact market shares across the group. However, we would view this as an attractive buying opportunity as history suggests underperformance should be temporary, with little lasting impacts on market share. This is particularly true for ETFC, as post-earnings share underperformance has continued; we still view risk / reward as compelling as our analysis of high-ROE bank peers suggests ETFC should be trading near ~13.5-14x NTM P/E vs. ~11x currently (Ex. 4).
EVR reported very strong results this quarter with 4Q EPS of $3.93, above our $2.23 and cons. of $2.18. Vs. our estimate, the beat was driven by record Advisory fees (+$1.48), better comp leverage (+$0.48), and lower sharecount (+$0.11), partially offset by higher non-comps (-$0.30) and minority interest (-$0.04). Results included some changes to the accounting presentation reflecting higher revenue gross-up with commensurate increase in expense, but these adjustments were neutral to earnings (see link for detailed historicals, pg. 2 for detailed earnings variance). Bottom Line: While EVR shares have been very strong out of the gate in ‘19 (>1,100bps outperformance vs. S&P), we see further runway as the company meaningfully exceeded our estimates (and cons.). Looking beyond 4Q, trends are fairly encouraging as backlog remains robust (+42% YoY vs. -7% for the industry) even with a high bar for 1Q19 cons. While late-cycle bears will argue this result may be as good as it gets for EVR (and M&A peers), consistent with our recent upgrade (see 2019 Outlook), risk / reward is improving even under a late-cycle valuation framework, supporting our relative preference vs. Lazard. Valuation is also undemanding with shares trading at <10x core 2018 EPS of ~$8.60 (excluding 1Q18 tax benefit) and consensus / shares poised to move higher following today’s result (1/30/19).
This week our WR Diversified Banks & Brokers Index was down modestly (-30bps), largely in line with the S&P Fins. (flat) and the broader market (-20bps). Share trends over the last week were quite bifurcated, with STT (+2%), AMTD (+2%), Citi (+1%), and BAC (+1%) the relative winners and ETFC (-6%), EVR (-2%), and MS (-2%) the laggards. That said, YTD performance remains quite strong, with our index outpacing the S&P 500 by ~700bps. Citi (+23%), BAC (+20%) and GS (+20%) have been clear winners so far, while LAZ (+5%), JPM (+6%), and MS (+8%) have been the relative laggards. As we approach the end of 4Q earnings season, we wanted to highlight some key debates on select stocks:
Following the conference call this morning (1/24/19), we are raising estimates modestly to reflect favorable guidance on a number of items including 1) comp; 2) buyback; and 3) cash balances. In our view, the big concern on RJF going into earnings was that street numbers were too high. However, coming out of the call, given greater visibility on costs, capital, and cash, even if we apply more conservative assumptions around capital markets and Institutional commissions, we see a clear path to >$7 EPS in 2019, suggesting cons. is doable. With shares trading at ~11x 2019E EPS, risk / reward is still favorable, though we continue to see greater upside potential at LPLA and SF. PT to $88 from $86; maintain Outperform rating.
ETFC reported 4Q18 of $1.07, vs. our $1.05 and cons. of $1.03. Vs our est., beat was driven by lower comp (+$0.03), provision (+$0.03), and sharecount (+$0.01), offset by weaker NII (-$0.02) and higher non-comp (-$0.03). Bottom line: ETFC results were the weakest so far, as we expected earnings resiliency in a down equity market which did not show through (client cash levels lower than expected despite meaningful declines in margin balances). We expect shares to underperform tomorrow, with results also likely to drive renewed calls for strategic actions. But while we acknowledge 4Q was discouraging, we would also note that one quarter does not an investment thesis break. Recall there were two key components to our investment case: 1) Earnings resiliency; and 2) Operating margin expansion. While the first of these did not materialize, mgmt. reiterated op. margin guidance for 2019-20 even without rate help. In our view, this, coupled with encouraging NIM guidance (320bps for 2019) still supports modest upside to cons. With shares at ~12x our 2019E (and trading down -4.5% after-market), we are staying the course, though acknowledge that from here the thesis becomes more of a “show me” story. For eBroker comparative trends, please see page 2.
RJF reported FY1Q18 EPS of $1.79, coming in ahead of our $1.74 and cons. of $1.73. Headline number is relatively clean (see variance on pg. 2); compared with our estimate, the beat was driven by higher fee income (+$0.02) and lower comp (+$0.10), which more than offset higher non-comps (-$0.03) and higher provision (-$0.05). Bottom Line: While revenue trends in 1Q were solid, price action will be tethered to mgmt. outlook, with the biggest areas of investor focus so far: 1) Strong uptick in Cash balances (and sustainability); 2) Commercial loan risk given uptick in provision; 3) Cost guidance (Professional, Other Expense); and 4) Capital return / appetite for buyback. Barring disappointing guidance in these four areas, given a relatively low bar with shares lagging peers >400bps YTD, we could see RJF outperform modestly, though it remains less clear whether cons. moves higher.
NTRS reported 4Q18 EPS of $1.80; adjusting for lower tax rate (~$0.15), core EPS was $1.65, slightly ahead of our $1.62 and cons. of $1.64. Versus our forecast, the beat was driven by higher NII (+$0.01) helped by higher asset yield as deposit beta (72%) came in above our expectation. Fees also came in above, helped by stronger FX trading (+$0.01) and Other Income (+$0.01). Bottom Line: While core results for the quarter were solid, we are wary of negative flow through from lower AUM (-9% QoQ), higher deposit beta (72%, vs. 56% in 3Q18), and continued noninterest-bearing deposit declines (-1% QoQ). While shares have lagged the peer group YTD (~300bps underperformance vs. BK / STT), our early read suggests little room for upward revisions, and we expect share reaction to be fairly muted.
AMTD reported FY1Q19 EPS (ex. intangibles) of $1.11 vs. our estimate of $0.98 and cons. of $1.01. Normalizing for a number of items (lower tax rate, lower advertising spend, and litigation settlement gain), we estimate core EPS of ~$1.04. Vs. our estimate, the beat was primarily driven by higher-than-expected NII / BDA fees (+$0.05) as well as lower operating expense (+$0.01). Bottom line: FY1Q results look good even when considering lofty expectations given a strong print from SCHW last week and AMTD’s share outperformance vs. peers (+10% over the last three months, >600bps ahead of SCHW and ETFC). That said, the near-term investment case could be muddied by investor questions surrounding: 1) sustainability of higher cash balances; 2) significant downtick in higher-yielding margin balances (-14% QoQ); 3) softer DARTs in Jan. (-11% MoM); and 4) lower flow-through benefit from gradual repricing of fixed rate balances (+$450mn, vs. +$900mn previously). We expect share price reaction to be fairly muted, with positive revisions contingent on commentary from management on sustainability of higher cash levels and the outlook for commission rates.