LPL Financial: Shares Show Value And Growth, But Price Action Less Compelling

Summary

• The market anticipates Fed rate cuts starting in the back half of this year, perhaps pressuring the Financials sector.
• One high-growth name in the space sports a strong YoY return, but the stock has pulled back.
• I see elevated near-term downside risks but continue to like the long-term growth narrative with LPL.

Michael Vi

The Fed’s jawboning has been something to behold. FOMC members have been paraded out to talk down market rallies in order to tighten financial conditions. Still, traders have priced in a substantial number of rate cuts beginning in the second half of this year. The Fed Funds rate is seen at 3.07% by late 2023 after peaking just shy of 5% this year. That could be a headwind for some banks and other financial institutions.

One name has an impressive 1-year return but has pulled back sharply lately. Is LPL Financial (NASDAQ:LPLA) a buy today or are the bears asserting control? Let’s dive in.

Lower Rates Ahead

Charlie Bilello

According to Bank of America Global Research, LPLA is the largest independent broker-dealer in the United States with roughly $1Tn in client assets. The firm supports more than 18,000 financial professionals and 450 independent registered investment advisor (RIA) firms nationwide, through a number of services including brokerage & advisory, investment solutions, technology and cybersecurity platforms, operational support, and compliance oversight.

The California-based $17.8 billion market cap Capital Markets industry company within the Financials sector trades at a high 28.9 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.5% dividend yield, according to The Wall Street Journal. With steeply rising earnings estimates, the forward P/E ratios are quite low, but a potential Fed pause, as priced in by the market, could be a risk to near-term net interest margins.

Longer-term a move toward higher-margin RIA channels should boost profits regardless of what the Fed does. Not surprisingly, LPL announced an acquisition in the investment services group back in November as it continues on its growth trajectory. That came after an earnings beat in October.

On valuation, analysts at BofA see earnings having risen big in 2022 with more massive EPS advances in 2023 before growth slows to 16% in 2024. The Bloomberg consensus outlook is not quite as optimistic as what BofA sees. Dividends, meanwhile, should continue to be soft at just $1 through the next several quarters.

Both LPL’s operating and GAAP earnings multiples are seen as retreating to favorable levels. I continue to like the forward PEG ratio under 0.5, but the price-to-book multiple, key for a Financials company, is very high near 9. Still, if you want robust diversified Financials growth, LPL is your play.

LPL: Earnings, Valuation, Dividend Forecasts

BofA Global Research

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, February 2 AMC along with reporting December interim sales metrics on Monday, January 16. The volatility catalysts don’t end there, though, as LPL’s management team is slated to speak at the Credit Suisse 24th Annual Financials Services Forum 2023 from February 13 through 15.

Corporate Event Calendar

Wall Street Horizon

The Technical Take

LPLA shares are down about 10% since I last featured the stock. Shares broke below key support in the $230s then went on to successfully test its rising 200-day moving average in December. With a decent bounce in the last few days, that long-term moving average is made all the more important. What the bulls want to see is LPL rising above $240 along with a bust higher in the RSI so that momentum confirms price action.

The bears are rooting for a break of the 200-day along with a lower low compared with the December nadir. Still, there should be decent support care of a high amount of volume of shares traded in the $170 to $195 range if we lose $200.

LPL: Shares Fall Below Support, 200-Day Offers Cushion

Stockcharts.com

The Bottom Line

I am downgraded LPL from a buy to a hold given weaker price action and momentum trends. I still like the valuation and growth prospects, but a challenging chart makes me cautious.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.