Raymond James Financial: Good Quarter, But Positive Outlook Priced In
Summary
- 1Q FY 2021 was a good quarter for Raymond James Financial, with its revenue and adjusted earnings per share up +8% and +19% YoY, respectively, which represented new historical highs.
- Lower short-term interest rates adversely affected the performance of Raymond James Bank, but this was more than offset by strong growth for the company's capital markets and asset management businesses.
- The FY 2021 outlook for Raymond James Financial is positive, but this has been priced in, and the market expects its earnings growth to slow down significantly by FY 2022.
- Raymond James Financial is valued by the market at consensus forward FY 2021 and FY 2022 P/E multiples of 15.4 times and 15.0 times, respectively.
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Elevator Pitch
I maintain my Neutral rating for Raymond James Financial, Inc. (NYSE:RJF).
This represents an update of my initiation article on the company which was published on January 18, 2021, and its share price has increased by +22% from $102.94 as of January 15, 2021, to $125.87 as of April 8, 2021, since my initiation. Raymond James Financial is currently valued by the market at consensus forward FY 2021 and FY 2022 P/E multiples of 15.4 times and 15.0 times, respectively.
1Q FY 2021 was a good quarter for Raymond James Financial, with its revenue and adjusted earnings per share up +8% and +19% YoY, respectively, which represented new historical highs. Lower short-term interest rates adversely affected the performance of Raymond James Bank which saw a -47% YoY fall in segment pre-tax income, but this was more than offset by strong growth for Raymond James Financial's capital markets and asset management businesses.
The FY 2021 outlook for Raymond James Financial is positive, but this has been priced in (current P/E valuations above historical averages), and the market expects its earnings growth to slow down significantly by FY 2022. Taking into account the above-mentioned factors, I retain a Neutral rating for Raymond James Financial.
1Q FY 2021 Was A Good Quarter For The Company
Raymond James Financial reported the company's 1Q FY 2021 results (YE September 30) on January 27, 2021, and its financial performance in the first quarter of the current fiscal year was better than what the market had expected earlier.
Its top line increased by +11% YoY and +7% QoQ to $2,222 million in 1Q FY 2021, which also represented a new historical high in terms of quarterly revenue. Raymond James Financial's revenue in the first quarter of FY 2021 was also +7% higher than sell-side's consensus 1Q revenue forecast of approximately $2.1 billion.
Raymond James Financial's GAAP and non-GAAP diluted earnings per share expanded by +18% YoY and +19% YoY to $2.23 and $2.24, respectively in the most recent quarter, which were the highest in the company's history as well. The company's 1Q FY 2021 GAAP and non-GAAP diluted earnings per share also beat market consensus' estimates by +32% and +33%, respectively. Raymond James Financial's share price rose by +4.4% from $95.41 as of January 27, 2021 (quarterly earnings were released on the same day after trading hours) to $99.61 as of January 28, 2021, which is a clear indication that the company's 1Q FY 2021 financial performance was viewed favorably by investors.
How Raymond James Financial's Non-GAAP Diluted Earnings Per Share Were Calculated
Source: Raymond James Financial's 1Q FY 2021 Earnings Supplement
Lower Short-Term Interest Rates Hurt The Company's Banking Business
With regards to the company's performance by business segment in 1Q FY 2021, Raymond James Financial's Capital Markets and Asset Management business segments did very well, but its Private Client Group (wealth management) and Raymond James Bank business segments disappointed.
Segment revenue and pre-tax profit for Raymond James Financial's Capital Markets business jumped by +69% YoY and +345% YoY to $452 million and $129 million, respectively, in 1Q FY 2021. This was driven by the good performance of both the Capital Markets business' investment banking and brokerage sub-segments, which delivered YoY revenue growth rates of +96% and +50% in the most recent quarter.
The company's Asset Management business saw its segment revenue rise by +6% to $195 million in 1Q FY 2021, while the segment's pre-tax income increased by +14% YoY to $83 million. This was in line with a +12% YoY growth in financial assets under management to $169.6 billion as of December 31, 2021, which benefited from fund inflows and the increase in the market value of the assets.
On the flip side, a +4% YoY increase in revenue and a +14% YoY growth in assets under administration for the Private Client Group segment in the first quarter of 1Q FY 2021 did not translate into bottom line growth. Pre-tax earnings for Raymond James Financial's Private Client Group business fell by -8% YoY to $140 million, which the company attributed to "the negative impact of lower short-term interest rates" in its recent quarterly earnings release.
Lower short-term interest rates had an even more severe impact on the Raymond James Bank business segment. Segment revenue and pre-tax income for Raymond James Bank dropped by -23% YoY and -47% YoY to $167 million and $71 million, respectively, in the first quarter of the current fiscal year. This was largely the result of a -1.21 percentage points contraction in net interest margin for Raymond James Bank from 3.23% in 1Q FY 2020 to 2.02% in 1Q FY 2021.
In my initiation article for Raymond James Financial published in mid-January 2021, I had cautioned that "Raymond James Financial's earnings for the banking business could continue to be depressed", assuming "short-term interest rates remain low for an extended period of time." This has turned out to be true, as evidenced by the poor performance of Raymond James Bank in the most recent quarter.
Positive FY 2021 Outlook
Looking ahead, the full-year FY 2021 financial performance of Raymond James Financial is largely dependent on the continued outperformance of the company's capital markets business, and a turnaround for the banking business.
At the 42nd Raymond James Annual Institutional Investors Conference on March 1, 2021, Raymond James Financial said that "we could be in for a cycle for a while" in its comments on the prospects of the capital markets business, considering that "states are going to have to fund, government infrastructure funding is going to go up." But the company also acknowledged that "I don't know how long it lasts." In other words, stimulus and fund flows are the key drivers of the company's capital market business, and these drivers are likely to be intact in the near term. But the music has to stop one day, and there could be a sharp reversal in the performance of Raymond James Financial's capital markets business in one of the future quarters, which could potentially de-rate the stock's valuations.
On the other hand, Raymond James Financial has noted at its 1Q FY 2021 results briefing in January 2021 that it is "hoping that growth in the bank's earning assets will more than offset the NIM (Net Interest Margin) compression and result in continued growth of the firm's net interest income", despite expectations of "another 10 basis points or so" decline in net interest margin for FY 2021. In my opinion, we should have already seen the trough for the banking business, and one should look forward to a gradual recovery for Raymond James Bank.
Sell-side analysts see Raymond James Financial's top line and normalized earnings per share growing by +13% YoY and +34% YoY to $8,997 million and $8.20, respectively, in FY 2021, and this indicates that market consensus expects the company's positive growth momentum in 1Q FY 2021 to be sustained for the full year. This suggests a very positive outlook for Raymond James in FY 2021.
However, I will argue that the positive outlook for Raymond James Financial in the current fiscal year has been priced into a large extent, with the stock's forward P/E multiples being above historical averages as detailed in the next section of this article. Also, note that Wall Street sees Raymond James Financial's top line and bottom line growth slowing to +5% YoY and +2%, respectively, in FY 2022. This is likely an acknowledgment that the strong performance of Raymond James Financial's capital markets business should normalize in a year or so.
Valuation And Risk Factors
The market currently values Raymond James Financial at 15.4 times consensus forward FY 2021 (YE September 30) P/E and 15.0 times consensus forward FY 2022 P/E. This represents a premium to its three-year and five-year average consensus forward next twelve months' P/E ratios of 12.3 times and 13.2 times, respectively.
The stock boasts consensus forward dividend yields of 1.2% and 1.3% for the current fiscal year and the next fiscal year, respectively. Market consensus expects the company to achieve a ROE of 15.3% in FY 2021 and a ROE of 14.6% in FY 2022.
Raymond James Financial's forward ROEs and dividend yields are roughly in line with that of its peers. Raymond James Financial trades at a slight premium to Stifel Financial (SF) based on forward P/E multiples, but the stock is valued by the market at a significant discount to its larger peer, The Charles Schwab Corporation (SCHW) on the same metric. This is understandable considering that The Charles Schwab Corporation is a much larger company with a market capitalization exceeding $100 billion, while Raymond James Financial's market capitalization is below $20 billion.
Raymond James Financial's Peer Valuation Comparison
| Stock | Consensus Current Year P/E Multiple | Consensus Forward One-Year P/E Multiple | Consensus Current Year ROE | Consensus Forward One-Year ROE | Consensus Current Year Dividend Yield | Consensus Forward One-Year Dividend Yield |
| The Charles Schwab Corporation | 22.7 | 21.5 | 12.6% | 16.3% | 1.1% | 1.2% |
| Stifel Financial Corp. | 13.8 | 13.3 | 13.8% | 13.0% | 0.9% | 1.0% |
Source: Author
The sell-side forecasts used in this article were obtained from S&P Capital IQ.
Raymond James Financial's key risk factors include a shorter-than-expected time taken for the strong growth momentum of the capital markets business to normalize, and short-term interest rates remaining depressed for a prolonged period of time.
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