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Analyst Blog

On Sep 18, 2013, we reiterated our long-term recommendation on Raymond James Financial Inc. (RJF - Analyst Report) at Underperform. Though the company’s fiscal third-quarter results were decent, a continuous rise in operating expenses and lack of geographic diversification remain causes of concern.

Why Underperform?

Higher expenses remain a major headwind for Raymond James. Non-interest expenses persistently increased over the last 3 fiscal years due to rising compensation costs. Moreover, as a result of the recent acquisitions, expenses will likely rise further, thereby exerting more pressure on the bottom line.

Moreover, estimates over the past 60 days have been declining with the Zacks Consensus Estimate for fiscal 2013 falling 1.5% to $2.68 per share. Also, for fiscal 2014, the Zacks Consensus Estimate moved south by 4.5% to 3.15 per share. Hence, with both these downward revisions, Raymond James now has a Zacks Rank #4 (Sell).

Lack of geographic diversification is a major concern for Raymond James. The company derives a major portion of revenues from its U.S. operations. Hence, the slow economic recovery and other macroeconomic issues in the U.S. could adversely impact its performance going forward.

Moreover, Raymond James’ profitability is will likely be dented by various financial reform laws. The latter are expected to reduce the company’s flexibility with respect to business investments and lending, to some extent, in the medium term.

Other Stocks Worth Considering

While we prefer to avoid Raymond James, other better performing brokerage stocks include Interactive Brokers Group, Inc. (IBKR - Analyst Report), E*TRADE Financial Corporation (ETFC - Analyst Report) and KCG Holdings, Inc. (KCG - Snapshot Report). All of these carry a Zacks Rank #2 (Buy).

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