Broadridge: Investor Communications Business Modestly Underpriced

Broadridge Financial Solutions (BR) was spun-off from ADP at the end of March, and looks modestly underpriced at the current quotation of $19.80.

Two-thirds of Broadridge's revenues come from handling investor communications for businesses. With all the shareholder activism and corporate buyouts, this has been a solid business in the past couple of years, and Broadridge is dominant, with around 70% U.S. market share. Broadridge also does trade settlement and clearing for securities transactions.

The primary negative with this story is that effective July 1, the SEC is implementing a new rule which will accelerate digital delivery of proxy and other investor communications. As this will push down the amount of paperwork Broadridge sends out, it will also pressure their revenue to an unknown degree. Management has not estimated, but is forecasting overall mid-single digit revenue growth.

Pro-forma, we estimate Broadridge will have operating cash flow of around $2/share and free cash flow of $1.70 or so a share. Leverage is modest, and the business has strong returns on capital with little required capital investment. Their competitive position is relatively strong. Even at $25, the business would be valued at less than a market multiple to free cash flow.

Disclosure: We own shares of Broadridge Financial Solutions.

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