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Rising Costs Curb Raymond James' (RJF) Profits: Time to Sell?

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Raymond James Financial’s (RJF - Free Report) mounting expenses are likely to hurt bottom-line growth in the quarters ahead. Further, the lack of geographic diversification remains a concern as it might hamper the company’s financials and limit flexibility.

The Zacks Consensus Estimate for the company’s earnings for for fiscal 2018 have witnessed a marginal decline over the past 30 days. As a result, Raymond James currently carries a Zacks Rank #4 (Sell).

Continuously rising operating expenses is a major challenge for Raymond James. Non-interest expenses have increased at a CAGR of 9.5% over the last four fiscal years (2014-2017). The same trend continued in the first six months of fiscal 2018 as well. Persistently rising compensation costs and higher bank loan loss provisions are the primary reasons behind the mounting expenses. Going forward, regulatory changes and a highly competitive environment is likely to lead to further increase in expenses.

Moreover, the company is yet to diversify its footprint successfully. Raymond James derives a major portion (more than 90%) of revenues from its U.S. operations. Though it has operations in Canada and Europe along with joint ventures in Latin America, these contribute a much lesser proportion of revenues in comparison with the U.S. Consequently, exposure to concentration risks could weigh on the company’s financials in the future.

Thus, given the concerns surrounding the company and downward estimate revisions, we believe that the stock has limited upside potential.

Nevertheless, Raymond James has accomplished several strategic deals over the last few years, given its strong liquidity position. Such acquisitions place the company well for future growth. Also, management expects to continue growing inorganically in the future. These initiatives are expected to offer support to the company’s bottom line to some extent.

Further, shares of the company have rallied 32.7% over the past 12 months, outperforming 27% growth registered by the industry.

Stocks to Consider

A few stocks in the same space worth considering are E*TRADE Financial Corporation (ETFC - Free Report) , LPL Financial Holdings Inc. (LPLA - Free Report) and Evercore Inc (EVR - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

E*TRADE Financial’s Zacks Consensus Estimate for the current-year earnings moved 11.3% upward over the past 60 days. The company’s shares have surged 26.8% over the past six months.

LPL Financial Holdings’ current-year earnings estimates have been revised 26.9% upward over the past 60 days. Its shares have gained 27.6% in the past six months.

Over the past 60 days, Evercore’s current-year earnings estimates have been revised 7% upward. Over the past six months, the company’s shares have rallied 18.7%.

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