MS announced its acquisition of Solium Capital this morning (2/11/19), a stock plan administration platform with 3,000 stock plan clients and 1mn participants, for cash of $900mn. In our view, this deal reinforces the value of the stock plan business and the importance of operating at scale; in particular we see a positive readacross for ETFC, whose Corporate Services business is one of the leading players in the space. Despite mixed price reaction, early investor feedback has been positive for both MS and ETFC.
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With conference season kicking off this week, we wanted to share a few files that we thought might be helpful. The first is our Question Bank, which includes both company specific and general questions for all of the firms in our coverage presenting and/or participating in 1x1s. We also included some Guidance Tearsheets which compare our modeled forecasts to each piece of company guidance in an easy-to-read format. Please feel free to use us as a resource in case you need anything ahead of your meetings.
SCHW presented 2019 Outlook and long-term growth targets as part of its Winter Business Update. Investor feedback was negative, particularly on bank growth, with the midpoint of earning asset guidance ~6% below the street. We anticipated that bank growth commentary could disappoint given lofty cons. expectations (see Weekly Chu), but guidance was even worse than we expected, with slower bank growth and expense guidance implying -3% downside to 2019 cons. even with a higher pace of buyback. We were pleasantly surprised by resilient share performance following the update but could see shares lag as investors unpack management guidance and cons. adjusts numbers accordingly. Our new TP of $48 (vs. $49 previously) implies 3% upside, suggesting balanced risk / reward. Maintain Peer Perform Rating.
This week our WR Diversified Banks & Brokers Index was up +10bps, trailing the broader market (+160bps) but tracking largely in line with the S&P Fins. (+10bps). We saw meaningful dispersion in terms of share performance as the Retail Brokers and M&A firms were powered by strong 4Q results / favorable guidance, with LPLA (+7%) and EVR (+6%) clear standouts. The biggest laggards this week were the asset sensitive banks and capital markets firms, including BAC (-4%) and MS (-3%). While bank / broker shares took a breather this week, YTD performance has been strong, particularly at those firms which underperformed by a wider margin in 4Q18 but reported strong results including EVR (+26%), LPLA (+23%), and Citi (+22%), while mixed 4Q results have weighed on performance at JPM (+6%), WFC (+6%) and MS (+5%).
LPLA reported 4Q18 of $1.36, vs. our $1.35 and cons. of $1.25. Vs. our est., the beat was driven by stronger cash sweep and transaction fees partially offset by weaker Advisory. Bottom Line: Strong 4Q trends (good organic asset growth, advisor recruiting momentum), continued buyback, and favorable guidance on ICA balances / yield suggest street numbers need to move meaningfully higher. Our updated 2019E is +11% above the street, and we note that this is conservative as we are near the high end of Core G&A guidance for the year. Positive revisions suggest recent share outperformance (+15% YTD vs. +7% S&P Fins.) is poised to continue; with shares trading at only ~10x 2019E EPS, we continue to see very compelling risk / reward (>20% upside). PT increases to $86 from $81; maintain Outperform rating.
SF reported 4Q18 EPS of $1.57 (ex-items), above our (and cons.) of $1.47. Versus our estimate, the beat was primarily driven by robust investment banking (+$0.06), better-than-expected Asset Management fees (+$0.05) and a lower sharecount (+$0.02). This was partially offset by higher expenses, as higher non-comp (-$0.05) outweighed good comp discipline (+$0.03). NIM expanded +2bps in 4Q to 289bps, coming in towards the lower end of management’s guidance range of 288-298bps. Bottom line: Stifel’s strong print reinforces the bull-case narrative, which we note is nicely laid out by management on slide 15, as stronger revenues, good comp discipline and accelerated capital return all contributed to the 4Q beat. While share performance has been strong YTD (+16% vs. +7% S&P 500) following a challenging 2018 (-30% vs. -6%), we would expect shares to outperform off the back of these very good results, with positive revisions likely as our current 2019E revenue estimate ($3.06bn) is at the low end of management’s updated guidance range ($3.05 to $3.35bn).
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).
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.
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