Ladenburg Thalmann Financial Services Inc.: What Next?

| About: Ladenburg Thalmann (LTS)


A well diversified investment banking firm, now in its 137th year.

For the quarter ending March 31, 2016, EBIDTA declined to $5 million from the $10.5 million earned in the March quarter of 2015.

Will strong insider holdings finally reward all shareholders?

As the 6th oldest member firm of the NYSE, Ladenburg Thalmann Financial Services Inc. (NYSEMKT:LTS) is engaged in independent brokerage and advisory services; investment banking; insurance brokerage; and asset management services. Through its principal subsidiaries, Ladenburg Thalmann & Co., Investacorp, Inc., and Triad Advisors Inc. LTS engages approximately 4000 independent advisors who manage over $125 billion of client assets. Its Assets Management Division currently has $2.1 billion in assets under management serving a variety of clients including high net worth individuals. Its Highland Capital Brokerage based in Birmingham, Alabama, provides life insurance, annuities and long term care products to LTS' independent brokerage network.

LTS is based in Miami, Florida. Ladenburg Thalmann & Co. is based in New York City, with regional offices in Miami and Boca Raton, Florida; Melville, N.Y.; Lincolnshire, Ill.; Los Angeles, Ca.; and Princeton, N.J.

Financial Overview

For the year ending December 31, 2015, revenues were $1.15 billion, a 25% increase over the prior year period. EBIDTA amounted to $43.6 million, a 29% decrease compared to the previous year. Primary reasons for the negative comparison were the industry wide slowdown in the alternative investment space and the decline in capital raises for equity capital as well as a drop off in the insurance brokerage segment.

Current price of $2.37 per share compares to reported book value of $2.10 per share. 52 week high was $3.80 (July 2015) compared to the 52 week low of $1.80 (October 2015). After repurchasing 5.7 million shares during 2015 at an average price of $2.41 per share, there are currently 183.6 million shares outstanding.

What sets LTS apart?

While over the last decade, LTS has been able to show good growth in revenues, earnings, book value and its presence in the market place, there may be other investment banking firms that may be as attractive on a fundamental basis given the current market environment.

What does make LTS worth a second or even a third look is the ownership breakdown of its common shares. 12% is held by institutions, and a solid 44% by the company's insiders. However, what no other publicly owned financial entity can claim is that one of this era's premier investors, Dr. Philip Frost, the company's chairman owns almost 14 million shares or 8%, while his real estate investment entity New Valley Corp. (owned by Vector Group) owns an additional 8%.

Since following Dr. Frost's success at LTS when he joined the Board in March of 2005 and assumed its chairmanship in July 2006, the one event one could count on was a constant accumulation of its shares on a month to month if not week to week basis. Other insiders, as well, accumulated shares on a regular basis. Until almost two months ago. Since March 31, 2016 not one share has been purchased by Dr. Frost or any other insider. WHY? One attribute that all great investors have is an exit strategy. Certainly, Dr. Frost has proven that multiple times whether it was with Key Pharmaceuticals, Ivax and a number of smaller examples. While he is a great investor and entrepreneur, his passion appears to lie in the pharmaceuticals/biotech arena, with Opko (NYSEMKT:OPK) being his current major commitment.

Being in his 80th year, the absence of any insider purchases may signal that the exit strategy for his LTS investment may be approaching. If that assumption proves correct-and please note it is an assumption, then today's entry point may prove very rewarding within a relatively short time frame. If this proves to be an incorrect assumption, then today's investors who do have an 18-24 months horizon, may still face a profitable outcome. The only analyst who follows LTS has a target of $4.00. By exiting LTS at this time, Dr. Frost would be able to focus all his energy and talent on Opko.

But let us consider that no event takes place that would make this investment a short term profitable trade. Fortunately or unfortunately, Dr. Frost, unlike most of his better known counterparts does not express his opinions or future plans on television talk shows nor in the printed or electronic media. His plans and ideas are his and he does not share them with mere mortals like us. So what is the company's outlook for the next 12-18 months? There are a number of positive factors that may move the price of the stock higher.

Under its current repurchase plan, the company still has 3.7 million shares to be purchased in the open market. Also, as is the case with most financial services companies, LTS will benefit from higher short term interest rates. As clients leave uninvested cash balances in their accounts, the benefit of higher rates will accrue to the company. The impact is difficult to determine since it will depend on the market environment in general and the speed at which short term rates will increase.

Also, the number of independent advisors is continuing to gain momentum that will benefit the company. Gone are the days of your friendly customers man who resided at the local brokerage office for his entire career, to be replaced by teams of entrepreneurs who prefer to literally run their own business. This will aid the company to grow its independent brokerage and advisory services business both organically and via acquisitions.

Finally, I am unable to present any organic or external factors that could have a major detrimental impact on the company's shares given their current level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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