LPL Financial Earnings: Strong Client Asset Inflows, but Environment Is Shaky

Narrow-moat-rated LPL Financial LPLA 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.

Net new client assets were $33 billion in the quarter and included nearly $11 billion of assets related to onboarding advisors from Commerce Bank and BancWest Investment Services. LPL Financial also announced a strategic agreement with Prudential Financial, where about $50 billion of client assets could be moved onto LPL’s platform in the second half of 2024 that will also generate about $60 million of EBITDA. While this was a strong quarter for net new client assets, total client assets of $1.238 trillion was down slightly from $1.240 trillion the previous quarter but up 19% from the previous year’s $1.038 trillion, due to movements in the stock market.

Gross profit of $1.01 billion grew 2% from the previous quarter, was up 21% from the previous year, but down 1% from the company’s first-quarter 2023 peak. As we mentioned in the previous quarter, cash-related revenue would likely be a headwind from clients moving cash balances to higher-yielding options and an eventual decrease in interest rates. Client cash revenue of $378 million was down 5% sequentially and down 14% from the first quarter of 2023.