Company Reports

LPL Financial was able to increase profit in the first quarter due to higher client asset levels and asset-based fees, but client cash-related revenue is flat. The company reported net income to common shareholders of $289 million, or $3.83 per diluted share, on $1.07 billion of gross profit. Gross profit increased 6% sequentially, as growth in client assets to $1.44 trillion drove 10% growth in advisory and commissions and 9% growth in other asset-based revenue. However, client cash-related revenue of $373 million was 15% lower than a year ago and flat sequentially. We don’t anticipate making a material change to our $311 fair value estimate for narrow-moat-rated LPL Financial and assess shares are fairly valued to slightly undervalued.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2023, advisors on LPL's platform served over $1.3 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management.

We are increasing our fair value estimate for narrow-moat LPL Financial to $311 from $289 per share. Our fair value estimate correlates to a price/forward adjusted earnings multiple of 16 times and an enterprise value/EBITDA multiple of 12.5 times. About half of the increase is from earnings since our previous valuation update and the other half is from miscellaneous adjustments to our model. While lower interest rates are a headwind for the financial sector, we still forecast LPL growing gross profit in the mid- to high-single-digit percentage range for the foreseeable future. We believe the growth will be from onboarding about $150 billion of client assets related to Prudential and Atria, which is more than 10% of client assets LPL had on its platform at the end of 2023, and client cash balances increasing from recently low levels.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2023, advisors on LPL's platform served over $1.3 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management.

LPL Financial announced that it’s acquiring Atria Wealth Solutions. Atria has about 2,400 advisors and works with about 150 financial institutions with $100 billion of client assets, which compares with LPL at the end of the fourth quarter of 2023, with 22,660 advisors and $1.35 trillion of client assets. LPL is paying about $805 million, but there’s also an additional $230-million earnout based on how many Atria advisors are retained and an expected $300 million-$350 million of onboarding and integration costs. With an 80% retention rate, LPL estimates that the acquisition will generate $140 million of run-rate EBITDA. At the low end, LPL would be paying about $1.1 billion for Atria, including $300 million of integration and onboarding costs, which seems reasonable compared with the $140 million of run-rate EBITDA. LPL plans to partially fund the acquisition with debt, which will raise its net debt/EBITDA ratio to about 2 times, and the company intends to pause share repurchases until the acquisition is closed in the back half of 2024. We will be remodeling narrow-moat-rated LPL Financial assuming that this acquisition goes through, but currently don’t anticipate it will lead to a significant change to our $289 fair value estimate for the company.

LPL Financial had a strong 2023, with recovering equity markets and high interest rates boosting earnings, and 2024 should see continued growth in revenue and earnings. The company reported net income of $1.07 billion, or $13.69 per diluted share, on $4 billion of gross profit in 2023. Gross profit increased 26% from the previous year with about 70% of the increase from client cash-related revenue, as high interest rates benefited the company, and the remainder driven by high client asset levels. We don’t anticipate making a material change to our $289 fair value estimate for narrow-moat-rated LPL Financial. We assess the shares as modestly undervalued.

We are increasing our fair value estimate for narrow-moat LPL Financial to $289 from $273 per share. Our fair value estimate correlates to a price/forward adjusted earnings multiple of 18 times and an enterprise value/EBITDA multiple of 12 times. There were multiple adjustments that led to the net $16 increase in our fair value estimate with some of the larger contributors being earnings since our previous valuation update, increasing our forecast promotion expenses, modeling interest rates staying higher for a longer period of time, decreasing our long-term growth rate for client assets, and increasing near-term asset growth for announced partnerships. We forecast a 10-year compound annual growth rate of around 8% to 9% for both revenue and gross profit. We expect operating margins to be in the mid- to high teens over the next couple of years, as the company benefits from high short-term interest rates, and to normalize at about 19%. Gross profit in 2023 could increase over 20%, as the company benefits from continued high interest rates. However, when the U.S. Federal Reserve begins to lower interest rates because of a successful soft landing or to combat a recession, gross profit growth will likely move into a mid- to high-single-digit range.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2022, advisors on LPL's platform served over $1 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management. Apart from independent advisors, LPL provides services to more than 2,500 advisors at banks and credit unions and more than 3,500 advisors licensed with insurance companies.

Narrow-moat-rated LPL Financial reported strong net new asset inflows, but shaky asset prices and interest rates that are likely to move lower in 2024 could suppress near-term earnings growth. The company reported net income of $224 million, or $2.91 per diluted share, on $1.01 billion of gross profit. Adjusted earnings per share that excludes acquisition costs, amortization, and a $40 million regulatory charge in the quarter was $3.73 compared with $3.94 the previous quarter and $3.13 a year ago. The $40 million charge was an SEC compliance charge related to record-keeping of electronic communications that multiple firms in the industry have also booked. We don’t anticipate making a material change to our $273 fair value estimate for LPL Financial and assess shares are modestly undervalued.

LPL Financial reported near-record earnings in the second quarter of 2023, but earnings could plateau until cash sorting has stabilized and stronger client asset growth will eventually be offset by lower interest rates. The company reported net income of $286 million, or $3.65 per diluted share, on $989 million of gross profit. Gross profit increased 39% from a year ago, mainly due to a $240 million increase in client cash-related revenue, but decreased 3% from the previous quarter. We don’t anticipate making a material change to our $273 fair value estimate for narrow-moat-rated LPL Financial and assess shares are modestly undervalued.

LPL Financial reported fairly good revenue and profit growth, but similar to other wealth-management firms, client cash-related revenue that had been a bright spot the previous several quarters is showing signs of slowing down. The company reported net income to common shareholders of $339 million, or $4.24 per diluted share, on $1.02 billion of gross profit. Gross profit increased 52% from the previous year, mainly from client cash-related revenue increasing to $439 million from $85 million the previous year. However, client cash-related revenue was flat sequentially, as higher revenue yields on client cash was offset by about a $10 billion decline in client cash sweep balances. The decline in cash sweep balances is due to clients sorting their cash into higher interest-yielding products and using their cash to invest and isn’t a sign of clients pulling their assets from the company. In fact, LPL Financial had over $20 billion of net new client assets in the quarter.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2022, advisors on LPL's platform served over $1 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management. Apart from independent advisors, LPL provides services to more than 2,500 advisors at banks and credit unions and more than 3,500 advisors licensed with insurance companies.

Most of the issues that affected Silicon Valley Bank don’t apply to the wealth management firms and investment banks that we cover, so we don’t plan to make material changes to our fair value estimates or Morningstar Economic Moat Ratings for Morgan Stanley, Goldman Sachs, Ameriprise Financial, Raymond James Financial, LPL Financial, Stifel Financial, Evercore Group, or Lazard.

We are increasing our fair value estimate for narrow-moat LPL Financial to $294 from $256 per share. Our fair value estimate correlates to a price/forward earnings multiple of 13 times and an enterprise value/EBITDA multiple of 9 times. Of the net $38 increase in our fair value estimate, about $14 is from the time value of money since our previous valuation update with the remainder about split among changes in our client cash-related revenue, expense forecasts, and a 50-basis point decrease in our cost of capital assumption. We believe gross profit in 2023 could increase over 30%, as the company benefits from continued high interest rates. However, when the U.S. Federal Reserve begins to lower interest rates due to a successful soft landing or to combat a recession, gross profit growth will likely have several years of being in the low single digits, if not being slightly negative.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2022, advisors on LPL's platform served over $1 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management. Apart from independent advisors, LPL provides services to more than 2,500 advisors at banks and credit unions and more than 3,500 advisors licensed with insurance companies.

LPL Financial is one of the companies most exposed to the level of interest rates, and so should continue to outperform peers in 2023—but could have a significant earnings decline when the U.S. Federal Reserve cuts interest rates. The company reported record quarterly net income of $319 million, or $3.95 per diluted share, on record gross profit of $972 million. Gross profit increased 16% sequentially and 51% from a year ago, and net income increased 38% sequentially and 195% from a year ago. The primary driver of the increase was client cash-related revenue that grew to $419 million, up 42% sequentially and up over 400% from a year ago. We don’t anticipate making a material change to our $256 fair value estimate for narrow-moat LPL Financial and assess shares are fairly valued to moderately undervalued.

As expected, LPL Financial reported strong third-quarter financial results thanks to higher interest-rate-related revenue and operating margin expansion. The company reported net income to common shareholders of $232 million, or $2.86 per diluted share, on $838 million of gross profit. Gross profit increased 33% from the previous year and 18% sequentially, while pretax income increased 122% from the previous year and 44% sequentially. We don’t anticipate making a material change to our $256 fair value estimate for narrow-moat LPL Financial; we assess the shares as fairly valued.

We are increasing our fair value estimate for narrow-moat LPL Financial to $256 from $221 per share. Our fair value estimate correlates to a price/forward earnings multiple of 14.5 times and an enterprise value/EBITDA multiple of 10 times. Of the net $35 increase in our fair value estimate, $22 is from increasing cash-related revenue, primarily from the company's plan to move excess client cash that is currently in money market funds into higher revenue-yielding client cash accounts. Of the remaining $13 increase, $9 is from other revenue adjustments and $4 is from increasing operating margins.

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2021, advisors on LPL's platform served over $1 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management. Apart from independent advisors, LPL provides services to more than 2,500 advisors at banks and credit unions and more than 3,500 advisors licensed with insurance companies.

As expected, LPL Financial's second-quarter results were better than peers', due to growth in interest-rate-related revenue and the corresponding expansion of the firm's operating margins. LPL Financial reported net income of $161 million, or $1.97 per diluted share, on $711 million of gross profit (which was a record for the firm). Gross profit increased 18% from the previous year and 6% sequentially with the majority of the increase from the previous year and all of the sequential increase driven by client cash levels and interest rates.