A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
We believe Broadridge Financial Solutions, Inc. (BR - Free Report) , with a market cap of $13.9 billion and expected earnings per share growth rate of 6.4% in 2020, is a stock investors should retain.
Shares of the company have gained 14% over past three months, against 10% decline of the industry it belongs to.
Factors Supporting the Rally
Broadridge’s robust business model ensures significant recurring fee revenues, including contributions from net new business, internal growth, and acquisition-related synergies. In the third quarter of fiscal 2020, recurring fee revenues of $834.5 million increased 8.7% year over year and contributed 67% to total revenues.
Broadridge has supplemented its internal growth with strategic acquisitions. The recent acquisitions of Rockall, RPM Technologies, Shadow and Fi360 are contributing significantly toward strengthening the company’s core franchise business across governance, capital markets, and wealth.
Broadridge has a consistent track record of rewarding shareholders through share repurchases and dividend payments. This instills investors’ confidence and boosts the company’s earnings per share.
Broadridge has a debt-laden balance sheet. Total debt at the end of third-quarter fiscal 2020 was $2.08 billion, more than $1.85 billion at the end of the prior quarter. The debt-to-capital ratio of 0.63 is higher than the industry’s 0.39 and the previous quarter’s 0.62. An increasing debt-to-capital ratio indicates that the proportion of debt to finance the company’s assets is on the rise, and so is the risk of insolvency.
Further, the company’s cash and cash equivalent of $402 million at the end of third-quarter fiscal 2020 was well below this debt level, underscoring that the company doesn’t have enough cash to meet this debt burden.
Zacks Rank and Stocks to Consider
Broadridge currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader Zacks Business Services sector are H&R Block (HRB - Free Report) , SPS Commerce (SPSC - Free Report) and SailPoint Technologies (SAIL - Free Report) . All three stocks carry a Zacks Rank #2 (Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term expected earnings per share (three to five years) growth rate for H&R Block, SPS Commerce and SailPoint is 10%, 15% and 15% respectively.
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