Onboarding Assets From Prudential And Wintrust Will Expand Adviser Network By 2025

Key Takeaways

• Innovative models and significant onboarding, including prudent acquisitions, aim to drive growth, enhance revenue, and expand the adviser network.
  
• Strategic investments in technology and share buybacks are expected to improve margins and increase earnings per share by optimizing cost structures and asset values.
  
• Long sales cycles and heavy investments in technology and acquisitions could slow revenue growth and pressure net margins if synergies aren't achieved.

Catalysts

Provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at enterprises in the United States.

• LPL Financial is focusing on creating innovative affiliation models, such as Strategic Wealth, Independent Employee, and enhanced RIA offerings, which are expected to drive sustained growth by attracting more advisers. This is likely to have a positive impact on revenue through increased advisory fees and asset growth.
  
• The company plans to onboard significant assets from Prudential Financial and Wintrust Financial by early 2025, which will add approximately $76 billion to its brokerage and advisory assets. This expansion is anticipated to boost revenue and earnings through increased fee income from managing more assets.
  
• LPL Financial closed a strategic acquisition of Atria Wealth Solutions and is on track for high retention rates, indicating potential for enhanced earnings growth by expanding its adviser network and realizing synergies from the acquisition.
  
• The company is investing in technology and operational efficiencies, which is expected to drive greater operating leverage, thereby improving net margins as they optimize cost structures.
  
• LPL Financial plans to restart share buybacks, aiming to repurchase $100 million worth of shares, reflecting a strategy that could enhance earnings per share (EPS) by reducing the number of shares outstanding while potentially taking advantage of current undervaluations.

LPL Financial Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LPL Financial Holdings's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $23.61) by about December 2027, up from $1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2027 earnings, down from 24.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

LPL Financial Holdings Future Earnings Per Share Growth

Risks

• The long sales cycle for onboarding new institutional clients could slow down revenue growth in that segment, impacting future revenues.
  
• Heavy investments in technology and acquisitions may affect net margins if synergies and efficiencies are not realized as planned.
  
• The high cost and complexity of integrating large institutions like Prudential could exert financial pressure if anticipated benefits aren't achieved, potentially affecting earnings.
  
• The firm's reliance on ongoing organic growth to drive cash balances means any slowdown in recruited assets or market downturns could strain liquidity and ultimately revenue.
  
• The need to continually enhance capabilities in high-demand areas like alternative investments may require significant ongoing investment, which could pressure net margins if costs outpace revenue gains.

Valuation

• The analysts have a consensus price target of $334.2 for LPL Financial Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $400.0, and the most bearish reporting a price target of just $277.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.6 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $329.4, the analyst's price target of $334.2 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.