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LPL Financial: Increasing Our Valuation as Client Asset Growth Offsets Rate Headwinds

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We are increasing our fair value estimate for narrow-moat LPL Financial LPLA 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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Wong

Director of Equity Research
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Michael Wong, CFA, CPA, is director of equity research, financial services, North America, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Michael previously served as chair of the valuation committee. Before assuming his current role in 2017, he was a senior equity analyst, covering investment banks and brokerages. Before joining Morningstar in 2008, he worked in corporate and public accounting.

Wong holds a bachelor’s degree in business administration, with concentrations in accounting, corporate finance, and financial services from San Francisco State University, where he graduated summa cum laude. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant. Wong has also passed the Certified Financial Manager (CFM) and Certified Management Accountant (CMA) exams.

Wong won the “Technology Thought Leadership” award at the 2016 WealthManagement.com Industry Awards for his report, The Financial Services Observer: The U.S. Department of Labor’s Fiduciary Rule for Advisors Could Reshape the Financial Sector. In 2011, he ranked second in the Investment Services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. Wong was awarded the summer 2005 Johnson & Johnson Institute of Management Accountants CFM Gold Medal.

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