Company Reports

Stifel Financial reported its second-highest quarterly revenue as its wealth management business continued its steady growth and its institutional capital markets business showed some signs of recovery. For the first quarter, the company reported net income to common shareholders of $154 million, or $1.40 per diluted share, on $1.2 billion of net revenue. Net revenue increased 5.1% year over year and 1.5% sequentially, as double-digit growth in asset management revenue, high-single-digit growth in commissions, and modest growth in investment banking revenue offset declines in net interest income.

We are increasing our fair value estimate for no-moat-rated Stifel Financial to $81 per share from $72. This implies an adjusted forward price/earnings multiple of about 11 times and a price/book ratio of 1.8 times. Of the net $9 increase in our fair value estimate, about half is due to earnings since our previous valuation update and half is due to miscellaneous adjustments, such as incorporating higher client asset levels after the appreciation of the stock market.

Stifel Financial’s revenue and earnings took a step back in 2022 and 2023 as higher net interest income from tightening monetary policy couldn’t offset the effects of fear of a recession on client assets and investment banking revenue. About 20%-25% of the company’s revenue is from net interest income, which grew about 80% in 2022 to $900 million and 25% in 2023 to $1.1 billion as the Federal Reserve increased interest rates. Net interest income will be a relative area of strength until the Fed reduces rates in response to either a recession or lower inflation. We currently forecast mid-single-digit revenue growth over the next couple of years as winds reverse, with capital markets revenue growth offsetting the effect of interest-rate headwinds on net interest income.

Stifel showed relative stability in a tough 2023 capital markets environment, and it has a strong foundation for future performance. The company reported net income to common shareholders for 2023 of $485 million, or $4.28 per diluted share, on $4.3 billion of net revenue. Stifel's top line decreased 1%, as a 3% increase in asset management revenue and a 28% increase in net interest income largely offset a 25% decline in investment banking and 6% decline in brokerage revenue during the year. We don’t anticipate making a material change to our $72 per share fair value estimate for no-moat Stifel and assess shares as being fairly valued.

Stifel's wealth management segment reported record revenue, but the capital markets business isn't experiencing a recovery yet. The company reported net income to common shareholders of $59 million, or $0.52 per diluted share, on $1.05 billion of net revenues. Similar to other investment banks, Stifel had elevated legal and regulatory charges in the quarter that included provisions for the SEC regarding record-keeping. Excluding the $67 million of charges would add about $0.58 to EPS. We don't anticipate making a material change to our $72 fair value estimate for no-moat-rated Stifel Financial and assess shares are modestly undervalued.

We are decreasing our fair value estimate for Stifel Financial to $72 per share from $81. Our fair value estimate implies an adjusted forward price/earnings multiple of about 12 times and a price/book ratio of 1.6 times. Of the net $9 decrease in our fair value estimate, most of it was due to forecasting lower institutional group revenue along with a related reduction in our normalized operating margin for the company. We currently assess the shares to be about fairly valued.

Stifel Financial’s revenue and earnings took a step back in 2022 and 2023, as higher net interest income from tightening monetary policy couldn’t offset the effects of fear of a recession on client assets and investment banking revenue. We currently forecast low revenue growth over the next couple of years. With the uncertainty in the economic environment, both wealth management and investment banking revenue will likely remain subdued. About 20% to 25% of the company’s revenue is from net interest income, and it grew about 80% in 2022 to $900 million, as the Federal Reserve increased interest rates. Net interest income will be a relative area of strength until the Federal Reserve reduces rates in response to either a recession or lower inflation.

Stifel Financial’s wealth management segment made a new high in quarterly net revenue, while the institutional securities business is at the lowest level since 2019. The company reported net income to common shareholders of $125 million, or $1.10 per diluted share, on $1.05 billion of net revenue. Net revenue was 5% lower than both the previous year and quarter. Wealth management segment revenue of $758 million that was 9% higher than a year ago due to net interest income bolstered results, as institutional securities segment revenue of $276 million was 33% lower. We don’t anticipate making a material change to our $81 fair value estimate for no-moat-rated Stifel and assess shares are moderately undervalued.

Net interest income growth had been a bright spot for wealth management firms over the previous several quarters, but net interest income growth has stalled and capital markets revenue remains stunted. Stifel reported net income to common shareholders of $148 million, or $1.28 per diluted share, on $1.1 billion of net revenue. Net revenue declined 1% from the previous year, while net income declined 10%. The small decline in net revenue is from $141 million of additional net interest income offsetting declines in trading, investment banking and asset management. The drop in net income is from a severe compression in the institutional group's operating margin to 10%, down from 22% the previous year. We had previously remarked that operating margins in the institutional group were abnormally high following COVID-19 at upward of 25% compared with a pre-COVID-19 range of 15% to 20% and that they were destined to normalize lower. We are maintaining our $81 fair value estimate for no-moat-rated Stifel Financial and assess shares are moderately undervalued.

Stifel Financial’s revenue and earnings took a step back in 2022, as higher net interest income from tightening monetary policy couldn’t offset the effect of a fear of a recession on client assets and investment banking revenue. We currently forecast low revenue growth over the next couple of years. With the uncertainty in the economic environment, both wealth management and investment banking revenue will likely remain subdued. About 20% to 25% of the company’s revenue is from net interest income, and it grew about 80% in 2022 to $900 million, as the Federal Reserve increased interest rates. Net interest income will be a relative area of strength until the Federal Reserve reduces rates in response to either a recession or lower inflation.

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.

In the tough 2022 environment, Stifel Financial reported its second highest annual revenue, which also marked the end of the company’s streak of 26 years of record net revenue. The company reported net income of $625 million, or $5.32 per diluted share, on $4.4 billion of net revenue for 2022. Net revenue declined 7.3% from the previous year, while net income to common shareholders decreased 20.8%. With the wealth management segment having recorded annual results growing revenue 8.7% and operating income 16.7% to $2.8 billion and $1.1 billion, respectively, it was the institutional securities business that caused the overall decline with revenue decreasing 28.6% and operating income 54.5% to $1.5 billion and $254 million, respectively. We don’t anticipate making a material change to our $83 fair value estimate for no-moat Stifel and assess shares are moderately undervalued.

Stifel Financial’s wealth management business and its related net interest income are providing some relief in the currently tough capital markets environment. The company reported net income to common shareholders of $142 million, or $1.21 per diluted share, on $1.05 billion of net revenue. Net revenue decreased 8.7% from the previous year and 5.7% sequentially with the majority of the decline stemming from the company’s institutional group where revenue fell about 30% from an elevated 2021 level and 17% sequentially. Pretax earnings fell 19.8% from the previous year and 5.8% sequentially. We don’t anticipate making a material change to our $83 fair value estimate for no-moat-rated Stifel and assess shares as undervalued.

Stifel Financial, along with other investment banks, had strong revenue in 2020 and 2021 as economic uncertainty led to strong trading volume. Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity. We currently forecast revenue to be relatively flat over the next couple of years. The unusually high institutional securities revenue of 2021, which was 36% higher than in 2020 and 77% higher than in 2019, should normalize lower. The reduction in institutional group revenue will be offset by the company’s banking business, which should experience significant growth over the next several years with rising interest rates. We currently forecast net interest income to more than double over the next several years from about $500 million, or 11% of net revenue, in 2021 to over $1 billion, more than 20% of net revenue.

Stifel Financial lowered its revenue outlook for 2022 to plus or minus 5% compared with 2021, which is still fairly good compared with most investment banks and wealth management firms. The company reported net income to common shareholders of $151 million, or $1.29 per diluted share, on $1.1 billion of net revenue. Net revenue declined 3.9% from the previous year, as a 21% decline in its institutional segment revenue to $411 million more than offset 9% growth in its wealth management business to $698 million. We don’t anticipate making a material change to our $86 fair value estimate for no-moat Stifel Financial and assess shares are moderately undervalued.

Many investment service firms (wealth managers, retail brokerages, custody banks, and asset managers) have material exposure to interest rates. Clients at wealth management firms and retail brokerages typically have 5%-20% of their account balance in cash that the financial institution sweeps into a bank subsidiary. The deposits are then used to make loans or invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.

Stifel’s relatively large wealth management business, net interest income, and acquisitions should contribute to relatively stable results for the firm. The company reported net income to common shareholders of $164 million, or $1.39 per diluted share, on $1.12 billion of net revenue for the first quarter of 2022. Net revenue declined 1.6% from the previous year, as a 23% increase in asset management revenue to $342 million wasn’t enough to offset revenue declines in other lines, such as investment banking that declined 25% to $255 million. We don't anticipate making a material change to our $86 fair value estimate for no-moat Stifel and assess shares are moderately undervalued.

We are increasing our fair value estimate for no-moat Stifel Financial to $86 from $71 per share. Our fair value estimate implies an adjusted forward price/earnings multiple of about 12 times and a price/book ratio of 2.1 times. Of the $15 increase in our fair value estimate, $11 is from increasing our modeled operating margins for the company by over 2-percentage points, $3 is from forecasting higher net interest income, and a net $1 is from miscellaneous changes, such as changing assumptions for investment banking revenue, client asset growth, and the balance sheet.

Stifel Financial, along with other investment banks, had strong revenue in 2020 and 2021 as economic uncertainty led to strong trading volume. Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity. We currently forecast revenue to be relatively flat over the next couple of years. The unusually high institutional securities revenue of 2021, which was 36% higher than in 2020 and 77% higher than in 2019, should normalize lower. The reduction in institutional group revenue will be offset by wealth management group revenue that grows with the market, and the company’s banking business should experience significant growth over the next several years with rising interest rates. We’re currently forecasting net interest income to more than double over the next several years from about $500 million, or 11% of net revenues, in 2021 to over $1 billion, more than 20% of net revenue.

Stifel Financial reported multiple records in the fourth quarter and for full-year 2021. The company booked record net income of $789 million, or $6.66 per diluted share, on record net revenue of $4.7 billion for the year. Both the global wealth management and institutional groups reported record results, as client assets grew to a record $436 billion and 2021 was an exceptional year for investment banking and trading activity. This was Stifel’s 26th consecutive year of record net revenue, and while we believe results will continue to be fairly good, there’s a good probability that its record net revenue streak will cease in the next year or two, barring sizable acquisitions. Along with fourth-quarter earnings, the company also announced that it is increasing its dividend 100% to $0.30 per quarter. We are increasing our fair value estimate for no-moat Stifel to $71 from $64, with $2 of the increase coming from earnings since our previous valuation update and $5 from assuming that there is no significant increase in corporate tax rates.