LPL Investment Holdings stands to take advantage of growth in the independent retail brokerage sector in the next three to five years, as the only publicly-traded company in this sphere, wrote Brad Hintz, senior analyst at BernsteinResearch, in a Dec. 28 research report. Still, he believes the company faces some hurdles on the road to long-term double-digit earnings growth.
Hintz gave LPL a market-perform rating and set a $38 six-month price target based on a 12-month earnings per share target of $1.71. As of Dec. 30, LPLA was trading at $35.38.
“Bernstein believes that the massive operating leverage of LPL’s technology based business model is the principal reason for investing in this stock,” said Hintz, in the report. “There is a substantial amount of operating leverage due to the high fixed cost base, technology and its nationwide infrastructure and even more so in a technology driven platform such as LPL or Charles Schwab.” Bernstein expects the margins of the company to expand by at least 20 percent in the next year.
LPL also stands to reap the benefits of projected growth in the independence channel. From 2008 to 2009, the independent channel’s share of the retail brokerage market by advisor headcount grew from 39.2 percent to 39.7 percent, while that of the employee channel fell from 60.8 to 60.3 percent, according to Cerulli Associates. This trend is expected to continue into 2014, with further market share gains for independent brokers of 150 basis points a year.
LPL went public in mid-November, with the stock opening at $30 a share and closing its first day at $32.15. LPL realized no cash from the sale; the shares that were sold were held by to two private equity firms that took stakes in LPL five years ago, Hellman & Friedman and TPG Partners. Based on third quarter numbers, LPL was initially trading at about 40 times trailing earnings.
Bernstein was especially upbeat on LPL’s growth prospects. “LPL is a rapidly growing technology-based processing and support firm servicing the most rapidly growing channel of the U.S. brokerage sector,” Hintz wrote. “For the next few years the picture is very bright.”
But beyond a three-to-five-year time horizon, Hintz says it’s difficult to make accurate forecasts for LPL because there is no pure-play competitor to benchmark the firm against. (In this report, Bernstein uses Schwab as a benchmark.)
In addition, LPL’s growth will largely depend on whether it can expand its advisor network. Senior executives of the firm have targeted a 20 percent earnings growth rate, which Bernstein believes is feasible for at least two years. “Longer term, LPL will face the challenge of maintaining growth as it is forced to move upscale from the pursuit of smaller advisors to competing with SCHW and Fidelity for larger RIAs,” Hintz said.
As of the third quarter of 2010, LPL had 12,017 advisors, more than quadrupling the 3,458 it had in 2000. Still, Hintz said about half of this growth came through acquisitions, while the other half came through recruiting. With LPL’s 2007 acquisitions of Pacific Life and SunLife, it added 2,200 advisors.
LPL held 3.6 percent market share of total advisors across all channels as of the end of 2009, and Bernstein expects its advisor network to grow by 5 percent per year on average.
“However, we note that as LPL grows its advisor headcount, its ability to constantly achieve revenue growth in excess of the aggregate independent servicing business will decline and eventually the company’s growth rate will fall to industry performance levels.” The 10-year growth rate for the independent brokerage industry is at 16.5 percent, according to Bernstein.
LPL’s growth will also hinge on overall market sentiment and retail investors’ appetite for equities, according to Hintz research. “And unfortunately the cycle is working against LPL,” Hintz said. “The long hoped for wave of retail investors streaming back to the equity market has not occurred.”
