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On January 4, 2013, we reiterated our long-term ‘Neutral’ recommendation on Raymond James Financial Inc. (RJF - Analyst Report) based on the company’s focus on opportunistic acquisitions and robust capital deployment activities. However, rising expenses and stringent regulatory landscape remain the major causes of concern for this Zacks Rank #3 (Hold) stock.

Why the Neutral Stance?

We have maintained this stance since only one out of eight estimates over the last 60 days has moved north, increasing the Zacks Consensus Estimate for fiscal 2013 by 1.9%. In addition, over the past four quarters, Raymond James has delivered an average earnings surprise of 4.1%. The company is expected to announce its fiscal first quarter 2013 results on January 23.

The Zacks Consensus Estimate for the fiscal first quarter is pegged at 70 cents along with a revenue estimate of $1,089 million. The company had delivered better-than-expected fiscal fourth-quarter earnings on the back of augmented top line, partially offset by higher expenses.

Further, focus on inorganic growth, history of boosting shareholders’ value through meaningful capital deployment activities along with stable liquidity position are the positives for Raymond James. The recent acquisitions of Morgan Keegan and MK Holding from Regions Financial Corp. (RF - Analyst Report) will significantly expand its brokerage and capital markets operations. Going forward, Raymond James is expected to pursue more acquisitions that will enhance its market share and revenue.

However, escalating operating expenses remain a major headwind for Raymond James. Continuously rising compensation costs along with spurt in acquisitions are expected to further increase the expenses, putting the bottom line under pressure. In addition, the company’s profitability remains vulnerable to the stringent regulatory landscape and absence of geographical diversification.

Other stocks to consider

Other stocks in the bank sector that are performing well and are worth considering include IberiaBank Corp. (IBKC - Snapshot Report) and Heartland Financial USA Inc. (HTLF - Snapshot Report). These companies carry a Zacks Rank #1 (Strong Buy).


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