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LPL Investments' (NASDAQ:LPLA) $445mm IPO - with a market cap of $3bb at the price range mid-point of $28.50 - is scheduled for Thursday, November 18, 2010.

Conclusion
The P/E multiple of 38 seems risky (annualizing September 30, 2010 nine months results) based on:

  • Highly debt leveraged
  • Negative tangible book value of almost $1bb
  • Interest payments (3.1% of revenue) exceeded after-tax profits (2.6% of revenue) for the nine months ended September 30, 2010
  • Can’t pay dividends because “senior secured credit facilities contain restrictions on activities, including paying dividends on capital stock.”
  • Since 2008 number of financial advisors remained near the 12,000 level
  • 100% of IPO proceeds to selling shareholders who are mostly executives plus Goldman Sachs, not a good sign

On the plus side:

  • 60% of revenue is recurring
  • According to Cerulli Associates, total U.S. assets under management will grow 22% from 2009 to 2012
  • From 2009 to 2012, the independent channels’ market share by number of advisors will grow by four percentage points to 44% and market share by client assets will grow four percentage points to 37%

Business

  • Provides brokerage and investment advisory services to over 12,000 independent financial advisors and financial advisors at financial institutions across the country, enabling them to successfully service retail investors with financial advice.
  • In addition, supports 4,000 financial advisors with customized clearing, advisory platforms and technology solutions.
  • 60% recurring revenue, as defined by LPLA.

Market Growth

  • Cerulli Associates forecasts that total U.S. assets under management will grow 22% from 2009 to 2012 due to factors such as the retirement of the baby boomer generation as well as the continued growth of individual retirement account rollovers.
  • Cerulli Associates estimates that from 2009 to 2012, the independent channels’ market share by number of advisors will grow by four percentage points to 44%, and market share by client assets will grow four percentage points to 37%.

Competition
Competes to attract and retain experienced and productive advisors with a variety of financial firms.

  • Within the captive wirehouse channel, which tends to consist of large nationwide firms with multiple lines of business, competitors include Morgan Stanley Smith Barney LLC; Merrill Lynch, Pierce, Fenner, & Smith Incorporated; UBS Financial Services Inc.; Wells Fargo Advisors, LLC, who typically focus on the highly competitive high net worth investor market.
  • Competition for advisors also includes regional firms, such as Edward D. Jones & Co., L.P. and Raymond James Financial Services, Inc. (NYSE:RJF) RIAs, who are licensed directly with the SEC and not through a broker-dealer, select third-party firms for custodial services, and competitors include Charles Schwab & Co. (NYSE:SCHW) and Fidelity Brokerage Services LLC.
  • In addition, also competes with a number of firms offering direct to investor on-line financial services and discount brokerage services, such as Charles Schwab & Co. and Fidelity Brokerage Services LLC.

Use of Proceeds
100% to selling shareholders

LPLA Valuation Metrics

Disclosure: none

Source: LPL Investments' IPO: P/E Multiple Seems Risky