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Inorganic Growth Supports LPL Financial (LPLA) Despite Cost Woes

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LPL Financial Holdings Inc. (LPLA - Free Report) remains well-positioned for top-line growth, supported by its solid advisor productivity and inorganic growth efforts. Moreover, even if the economic situation worsens, the company’s current liquidity position is enough to meet its interest and debt obligations.

However, persistently increasing expenses are expected to hurt its bottom line to an extent in the near term.

Over the past 30 days, the Zacks Consensus Estimate for the company’s current-year earnings has been unchanged, reflecting that analysts are maintaining a neutral stance toward the stock. Thus, it currently carries a Zacks Rank #3 (Hold).

Shares of LPL Financial have gained 35.8% over the past six months compared with 43% growth recorded by the industry.

Looking at fundamentals, the company’s advisory revenues (constituting 39.4% of net revenues in the first nine months of 2020) witnessed a six-year (2014-2019) compound annual growth rate (CAGR) of 8.2%, with the uptrend continuing in the first nine months of 2020. Given its recruiting efforts and continued solid advisor productivity; advisory revenues are expected to improve further. Moreover, the acquisition of Allen & Company will likely support advisory revenues.

Given a solid balance sheet position, LPL Financial remains on track to grow inorganically. It has accomplished several deals over the past few years. Recently, it inked a deal to acquire Waddell & Reed's wealth management business for $300 million. In October 2020, it acquired Blaze Portfolio, while in August it acquired the assets of E.K. Riley Investments, LLC, and Lucia Securities. These deals along with the other completed deals in the past poise LPL Financial well for future growth.

Moreover, LPL Financial is expected to continue to enhance shareholder value through meaningful capital deployments. It pays dividends on a quarterly basis and has a share buyback program in place. As of Sep 30, 2020, the company had the authorization to purchase up to $349.8 million worth of shares. While repurchases are currently paused in response to the coronavirus outbreak, the company is expected to sustain efficient capital deployments in the future, supported by a solid capital position.

However, its expenses have witnessed a CAGR of 9.1% over the past four years (2016-2019), with the uptrend continuing in the first nine months of 2020. The rise can be attributed to an increase in almost all cost components. As LPL Financial continues to increase headcount, compensation and benefits costs are expected to keep on rising, thus, hurting the bottom line to an extent.

Moreover, a large part of the company’s revenues comes from commissions. Commission income is dependent on the overall performance of the capital markets. Over the last six years (2014-2019), the company’s commission revenues declined at a CAGR of 2.2%, with the downward trend continuing in the first nine months of 2020. Thus, given the cyclical nature of the capital markets, commission revenues will likely continue to be hurt if there is a further slowdown in market activities.

Further, the presence of substantial amounts of goodwill and intangible assets on LPL Financial’s balance sheet, which is subject to annual impairment reviews, remains concerning.

Stocks to Consider

A few better-ranked stocks from the finance space are mentioned below.

Credit Acceptance Corporation (CACC - Free Report) has witnessed an upward earnings estimate revision of 80.1% for 2020 over the past 60 days. This Zacks Rank #2 (Buy) stock has depreciated 1.2% over the past three months.

The Charles Schwab Corporation’s (SCHW - Free Report) current-year earnings estimates rose 8.8% in 60 days’ time. Further, the company’s shares have appreciated 45.5% over the past three months. At present, it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. (RJF - Free Report) has witnessed an upward earnings estimate revision of 10.2% for the current fiscal year in the past 60 days. This Zacks #2 Ranked stock has gained 28.5% over the past three months.

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