LPL Financial Earnings: Near-Record Earnings, but Earnings Could Plateau for a While

LPL Financial LPLA 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.

The client cash trend that we noted in the previous quarter continued. Even though average revenue on client cash increased to 3.14% from 3.08% the previous quarter, client cash-related revenue decreased $42 million because balances decreased by $4.6 billion. Other investment services firms have been under similar pressure. Positive for these firms is that the client “cash sorting,” where clients move cash from lower-yielding accounts into higher-yielding products, seems to have materially slowed in May and June compared with earlier this year. LPL’s management stated that it doesn’t believe client cash can move significantly lower than the 4% of client assets seen in the second quarter and that clients are about fully invested in the market. While cash sorting is slowing, eventually lower interest rates will lower cash-related revenue and operating margins.

The company announced it is acquiring the wealth management business of Crown Capital that has about $6.5 billion of client assets. LPL should also be onboarding $4 billion to $5 billion of client assets from its agreement with Commerce Bank later in the third quarter. Management increased the low end of its expense growth guidance to 13% from 12%, but we find this uneventful, as much of the revenue growth this year is related to accelerating future investments in the company.