LPL Financial: Compounding Through The Cycles (NASDAQ: LPLA)

LPL Financial: Compounding Through The Cycles (NASDAQ: LPLA)

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LPL Financial (NASDAQ: LPLA), whose integrated platform of brokerage and investment advisory services spans> 20k independent financial advisors, offered investors lots to chew on with its Q1 2022 numbers. With organic growth running at ~ 10% for the year and the deal pipeline is still robust, the recent stock price weakness post-results create a compelling entry point in the LPLA story. Plus, LPLA offers a clean way to play the hike cycle rate and structural growth tailwinds for the long-term, so the current ~ 11x fwd P / E strikes me as undemanding relative to the underlying earnings power.

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Steady as She Goes

LPLA’s core business momentum showed signs of acceleration in Q1 2022, as net new assets (NNA) hit $ 6.3bn in March (up from $ 5.2bn and $ 6.1bn in February and January, respectively). This bodes well for NNA heading into Q2, particularly given the fading geopolitical and macro headwinds (likely the cause of the NNA slowdown earlier this year). In line with guidance, I see a ~ 10% organic growth scenario (vs. ~ 13% in 2021) as firmly intact for 2022, followed by a sustained high single-digit growth rate in the mid to long-term. While promotional expense will likely be a headwind, the higher run rate is mainly a function of onboarding higher-margin assets and thus, should boost revenue growth over the long run. Plus, the added G&A is more than offset by the benefit of higher rates ahead, so I see LPLA remaining on track to unlock> $ 20 / share in earnings power by 2024. Given this doesn’t account for the optionality of a growing FCF stream and increased balance sheet flexibility, there is ample room for LPLA to unlock an even higher earnings run rate in the coming years.

LPL Financial Monthly Asset Growth

LPL Financial

Source: LPL Financial Q1 2022 Presentation

Robust Deal Pipeline Supports AUA Growth

Beyond the typical organic growth drivers, LPLA continues to tap into the institutional bank channel to accelerate its earnings growth story. Onboarding BMO Harris (BMO) and M&T Bank (MTB) in H1 2021, for instance, added ~ $ 35bn of combined assets and ~ 280 advisors. For 2022, key additions include CUNA Brokerage Services in Q2 2022, onboarding ~ $ 36bn in brokerage / advisory assets and ~ 550 advisors, as well as People’s United Bank (PBCT) later this year (~ $ 6bn of combined assets and ~ 30 advisors ). Excluding PBCT, disclosed recruited assets under administration (AUA) totals ~ $ 9bn YTD, with April recruited AUA significantly above the March total – a welcome acceleration in the pacing of recruitment following a slowdown in Q1 2022. In the near term, the net effect of onboarding a bank to LPL’s institutional platform is a slight skew in the asset mix towards brokerage, which entails a headwind to cash balances. This balances out over time, though, as accounts are converted to advisory to fund periodic fees and to facilitate portfolio rebalancing and thus, should have a limited impact on LPLA’s overall rate sensitivity.

Poised to Benefit from the Coming Rate Hikes

The key to LPLA stock working in the near term is the macro set-up, in my view. In particular, rising rates will be massively accretive to earnings – the first rate hike is guided to add an incremental ~ $ 100m to the gross profit (ie, a low-teens% lift to the EPS run-rate) in Q2 2022. Assuming management’s call for another four hikes comes through, this would translate into ~ $ 330m to gross profit (an incremental ~ $ 3 / share of EPS or a> 40% lift to the earnings run rate). There remains ample scope for additional upside, though, given LPLA’s conservatism and the Fed’s growing hawkishness – since its initial guidance, management has steadily raised its interest rate sensitivity estimates, with the first rate hike benefit now expanding by ~ $ 10m and the second hike translating into an added ~ $ 20m.

LPL Financial Rate Sensitivity Guidance

LPL Financial

Source: LPL Financial Q1 2022 Presentation

Plus, LPLA also most recently reported an increase of ~ $ 3bn in its floating rate Insured Cash Account (ICA) balance, indicating potentially higher demand going forward. As we move deeper into the rate cycle, expect the returning demand for fixed rates to drive a higher fixed proportion, with longer durations certainly possible as well. Net, LPLA could unlock significant upside to its current rate sensitivity forecasts after the first two hikes should it successfully shift customer money market overflow balances back into the ICA – thus far, the company has already made progress here, with $ 3bn of balances migrated in Q1 2022 and ~ $ 15bn left to go. All in all, the swiftness of the Fed’s rate hikes in recent months, along with the ongoing quantitative tightening and growing loan balances, leave LPLA in a prime position to capitalize on an uptick in ICA deposit demand from banks.

Compounding Through the Cycles

LPLA remains one of the cleanest ways to play rising rates in the coming months, in my view. Assuming the COVID-induced acceleration of advisor network consolidation sticks, I see ample room for an acceleration of organic recruiting and net new asset growth in the coming years as well, particularly given LPLA’s competitive positioning. Thus, I think LPLA has a clear path to unlocking ~ $ 20 / share in earnings power over the mid to long-term, while the growing FCF generation offers good option for more M&A or buybacks as the balance sheet further deleverages.

LPL Financial EPS Growth

Author

Source: LPL Financial Disclosures, Author

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