LPL Financial Holdings Inc. provides solutions for financial advisors. (NASDAQ:LPL) reported a 62% increase in EBITDA in 2022. With interest rates at current levels, many financial advisors joining the company, inorganic growth and reinvestment in technology solutions, I am optimisticLPL. I believe that the flexibility LPL offers with its platform will likely accelerate new product launches, which could also boost FCF's growth. Even allowing for risks from regulators or changes in credit markets, I believe the LPL could trade at higher prices.
With more than 21,000 financial advisors worldwide, including advisors to 1,100 major corporations and 500 other internationally registered companies, LPL is a leading broker in the financial advisory and advisory market.
The company is currently considered one of the largest US companies in its industry. Aside from that,provides investment advice and related services through analytical information technologies, hands-on management programs, brokerage platforms, and long-term business planning and consulting.
LPL has managed to develop a business model that serves its customers and their customers, as the company offers a wide range of options when it comes to developing a strategy or planning a project according to the specific needs of each customer, including Technologies, aspects and support in investor management.
The business is essentially based on the relationship with consultants. The company does not offer a specific product of its own, which makes it easier for its clients, whether they are independent consultants or in large companies, to offer low-conflict management.
Among its more than 21,000 directors, there is an average of 20 years of experience in the industry, demonstrating the company's vast experience. Most of them are independent consultants working in regional areas, attracting capital investment in rural and suburban areas. Within this group of advisors are advisors who have been licensed by LPL Financial and have the ability to settle trades for flat fees on the company's platforms. Use of the company's platform is allowed at monthly flat rates.
With the recent rate hikes, I think it's a good time to take a closer look at this business model. At the same time, the company seems to act as a hedge against market volatility, so I believe the LPL can also compensate in the event of a crisis. Among the slides I saw from a recent quarterly report,The following is what I think is most relevant.
Additionally, it's worth noting that most operational metrics performed well in 2022. The number of consultants increased from 19,000 in 2021 to almost 21,000 in 2022. In addition, the company reported a 62% increase in EBITDA, aSignificant increase in net profit and increased sales.
In 2022, LPL reported a significant increase in cash and total assets driven by funds donated by clients. In addition, the total assets to total debt ratio has also increased in 2022 and the total amount of corporate debt has decreased. All in all, I see the balance sheet as being in good shape.
As of December 31, 2022, LPL reported $847 million in cash and equivalents and approximately $2.199 billion in cash and equivalents segregated as required by federal or other regulations, which I included for the carrying amount calculation in my DCF model have.
Receivables from brokers, dealers and clearing organizations were $56 million, including $1.123 billion in advisory loans, $677 million in other receivables and $780 million in property, plant and equipment . With goodwill of $1.642 billion and other intangible assets of $427 million, total assets are $9.48 billion.
Given the overall level of goodwill, it makes sense to mention a few recent acquisitions to observe the nature of the businesses acquired. In 2022, LPL acquired FRGIS for US$140 million and customer relationship intangibles for US$54.1 million. I think most financial analysts will appreciate the fact that the company is active in the merger and acquisition markets.
On November 2, 2022, we entered into a definitive purchase agreement to acquire FRGIS, an independent subsidiary and brokerage firm that supports approximately 800 advisors and 85 financial institutions and manages approximately $40 billion of brokerage and advisory assets, for an initial payment of approximately $140 million with potential contingent payments over the three years following closing. The transaction closed on January 31, 2023. Source: Annual Report
As a result of acquisitions in our liquidity and succession solution, we acquired $54.1 million in customer relationship intangible assets. Source: annual report
The list of liabilities included $2.694 billion in liabilities, $147 million in liabilities to brokers, dealers and clearing organizations, and $203 million in accrued consulting expenses and commissions payable. In addition, corporate debt and other borrowings totaled $2.717 billion, slightly less than in 2021. Finally, total debt was $7.314 billion.
I like the business model because the company doesn't need a lot of debt to fund the balance sheet. LPL appears to be using money from clients, and brokers and dealers are helping as well.
Assumptions behind my DCF model
In this perspective, LPL should benefit from permanent reinvestments, mainly in technological research and the development of its platform. Additionally, increased sponsorship funding can help the company benefit from economies of scale, which can increase earnings per share and overall operating margin. In this context, the latest report is noteworthy. I think we can easily see how more assets and more money came onto the platform. We can also observe that profitability has increased at the same time.
I also believe in expanding the customer base in the future. Productivity gains for existing customers will continue as I believe the platform offered by LPL is unique. The recent impressive increase in total assets shows that the platform seems to offer what advisors need. In addition, the company seems to pay special attention to end customer experiences. In this regard, I believe the following information from management is critical to understanding the success of the platform.
Finally, consistent with my financial model, I have assumed that the overall addressable market is likely to increase thanks to potential partners and the modification of the existing product to serve new markets. In line with these ideas, LPL appears to have developed a platform that aims to be flexible and resilient to meet the needs of clients across sectors and geographies.
My DCF model
My cash flow statement financial forecast included net income of $625 million in 2029, depreciation and amortization of $168 million, amortization of other intangible assets of nearly $81 million, and stock-based compensation of nearly $46 million .
Additionally, with an income tax provision of nearly -$103 million, I include a $160 million loan forgiveness. My numbers are not far from the numbers reported for 2022, 2021 and 2020. I expected some net income growth and some D&A growth.
The low end of the cash flow statement included changes in accounts receivable of $187 million, changes in accounts receivable of $407 million, changes in accounts receivable of -$509 million and changes in accounts receivable from brokers of $433 million.
Additionally, for changes in liabilities of $261 million and other liabilities of $188 million, the 2029 CFO would be closer to $1.498 billion. Finally, with capital expenditures of -$48 million in 2029, I have free cash flow of nearly $1,451 million.
Assuming an EV/FCF of nearly 24x, which is roughly the median of EV/FCF over the past decade, I came up with an enterprise value of nearly $19 billion.
Now if we add up the cash and cash equivalents and the cash segregated under federal regulations and subtract the debt of $2.7 billion, the book value would be $19 billion. Ultimately, the implied price would be closer to $253 per share.
Share Buyback Program
The Board of Directors has recently purchased a significant number of shares from the market. We're talking about a program that includes potential stock buybacks worth $2 billion. In my opinion, the LPL would not have bought its own shares if they were expensive.
Competitors and Risks
There is competition from similar or smaller agencies when it comes to retaining and attracting consultants across the country. This market is highly fragmented at a national level and consists primarily of small regional brokerage houses that rely on third party companies for the technology needed to operate. There is also competition from some consultants, mainly within large companies and specializing in specific niches where they dominate due to their experience and recognition. Other independent companies registered with the SEC or their respective states and not through brokers can choose from a large number of third-party providers to protect their services.
There is also competition among the consultants served by LPL. These include banks, insurance companies or asset management companies, brokerage services or Internet agencies that offer their customers services without intermediaries.
Additionally, the environment in which the Company operates is highly competitive and is directly supported by its ability to attract and manage new customers as well as services acquired from third parties. When considering operational risk, we must consider the potential fall in interest rates, changes in credit conditions and access to liquidity in conducting certain operations. If financial markets deteriorate, I think LPL could see margins shrink. Furthermore, if clients decide to withdraw their savings or advisors lose clients, the overall asset value will decrease and the effect of economies of scale will likely disappear.
There are also many regulatory risks specific to each region or type of bond. For example, the regulation of cryptocurrency brokerage practices, which has become a haven of uncertainty for some and a safe haven for others. Compliance with any of the federal and state regulations, or sudden changes in legislation in this regard, can seriously affect the Company's operating conditions.
LPL has recently posted an impressive increase in EBITDA, driven by an impressive increase in the number of advisors and the recent increase in interest rates. In my opinion, further reinvestment in technology solutions for advisors and sponsorship funding will likely increase economies of scale, which could accelerate FCF margin expansion and justify higher stock valuations. In addition, new agreements with potential partners in new regions and modification of the existing product to serve new markets may improve the product offering and further increase sales. Even allowing for risks from regulators or changing market conditions, I think the LPL could be trading higher soon.
This article was written by
Former institutional investor, currently retired, residing in Europe. I do not offer financial advice. This is just my opinion on growth stocks and some mining games. -------- DISCLAIMER ----------- My information and comments should not be construed as an endorsement or an offer to buy. The materials and information provided by the author are not and should not be construed as an offer to buy or sell any securities mentioned in the articles herein.
Disclosure: I/We have a long and advantageous position in LPLA stock through equity ownership, options or other derivatives. I wrote this article myself and it expresses my own opinion. I get no compensation for this (apart from Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.