LPLA Stock Study (7-10-23)

I recently did a stock study on LPL Financial Holdings Inc. (LPLA) with a closing price of $224.82.

Value Line writes:

     > LPL Financial Holdings, Inc. is the nation’s largest independent
     > broker-dealer, a custodian for registered investment advisors,
     > and an independent consultant to retirement plans. It provides
     > an integrated platform of brokerage and investment advisory
     > services to nearly 20,000 independent financial advisors and
     > professionals at approximately 800 financial institutions and
     > approximately 500 registered investment advisers.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 10.7% and 23.2%. Lines are mostly up, straight, and narrowing except for sales dips in ’16 and ’20 and EPS dips in ’15, ’20, and ’21. PTPM leads peer and industry averages while trending higher in recent years from 25.0% in ’13 to 36.3% in ’22 with a last-5-year mean of 32.4%.

Over the past decade, ROE also leads peer and industry averages while going from 16.1% in ’13 to 41.2% in ’22 with a last-5-year mean of 40.4%. The trifecta cannot quite be completed as Debt-to-Capital is also higher than peer and industry averages despite trending down over the last five years with a mean of 66.5%.

Value Line reports Interest Coverage at 7.0, Current Ratio of 2.0, and a Financial Strength rating of B+. M* gives a Standard rating for Capital Allocation.

With regard to sales growth:

• CNN Business projects 15.1% YOY and 12.6% per year for ’23 and ’22-’24 (based on 11 analysts).
• YF projects YOY 15.1% and 9.6% for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY 15.9% and 9.4% for ’23 and ’24, respectively (3).
• Value Line projects 8.2% annualized growth from ’22-’27.
• CFRA projects 15.5% YOY and 12.1% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 66.0% per year along with 8.0% per year for the next 10 years in its analyst note.

I am forecasting at the bottom of the range: 8.0%.

With regard to EPS growth:

• CNN Business projects 44.7% YOY and 25.0% per year for ’23 and ’22-’24, respectively (based on 11 analysts), along with 5-year annualized growth of 20.5%.
• MarketWatch projects 26.1% and 22.8% per year for ’22-’24 and ’22-’25, respectively (14 analysts).
• Nasdaq.com projects 4.8% YOY and 7.5% per year for ’24 and ’23-’25 (6, 6, and 2 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 20.5%.
• YF projects YOY 44.8% and 8.9% for ’23 and ’24, respectively (11), along with 5-year annualized growth of 15.9%.
• Zacks projects YOY 44.2% and 5.5% for ’23 and ’24, respectively (6), along with 5-year annualized growth of 20.5%.
• Value Line projects 14.0% annualized growth from ’22-’27.
• CFRA projects 53.8% YOY and 27.1% per year for ’23 and ’22-’24, respectively, along with 3-year CAGR of 27.0%.
• M* projects long-term annualized growth of 13.4%.

I am forecasting below the long-term-estimate range (mean of six: 17.5%) at 13.0%. I will use ’22 EPS of $10.40/share as the initial value rather than ’23 Q1 EPS of $13.02 (annualized).

My Forecast High P/E is 16.0. Over the past decade, high P/E has ranged from 14.3 in ’19 to 32.3 in ’14 with a last-5-year mean of 21.0. The last-10-year median is 24.3 and the last-5-year-mean average P/E is 16.2. I am forecasting just below the latter [only ’19 and ’18 (15.1) are lower].

My Forecast Low P/E is 13.0. Over the past decade, low P/E has ranged from 5.5 in ’20 to 21.9 in ’14 with a last-5-year mean of 11.4. The last-10-year median is 13.6. I am forecasting just below the latter.

My Low Stock Price Forecast (LSPF) is the default $136.20 based on $10.40/share initial value. This is 39.9% less than the previous closing price and 18.0% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 9.6% in ’22 to 57.5% in ’15 with a last-5-year mean of 16.0%. I am forecasting below the range at 9.0%.

These inputs land LPLA in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 7.0%.

PAR (using Forecast Average—not High—P/E) of 4.9% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 13 studies over the past 90 days (my study and eight outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.7%, 12.9%, 19.8, 11.4, and 16.0% respectively. My EPS growth rate and Forecast Low P/E are higher, but 13 studies is too small a sample size for a valid comparison. Value Line projects an average annual P/E of 20.0, which is higher than MS (15.6) and mine (14.5).

MS high/low EPS is $21.74/$9.67 vs. my $19.16/$10.40 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $118.60 implies a Forecast Low P/E of 12.3 vs. 11.4 (see above). Although MS LSPF is 7.6% higher than the default value of $9.67/share * 11.4 = $110.23, being ~50% lower than the previous close is quite sufficient. It’s also 12.3% lower than mine. This is unusual but again, I can’t draw valid conclusions from such a small sample size. MS LSPF includes five studies under $110—the lowest of which are $69.00 and $39.70. One could argue all five of these as unreasonably low.

Based on my conservative inputs and Value Line’s future average annual P/E, I think MOS in the current study is moderate.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. Zacks reports PEG of 0.66, which is the lowest I’ve seen so far (anything under 1.00 is generally regarded as undervalued). Relative Value (M* data), however, is just slightly overvalued at 1.08.

I would look to re-evaluate LPLA under $178/share.