Here's Why LPL Financial (LPLA) Stock is Worth Betting On Now
It seems to be a wise idea to add LPL Financial Holdings Inc. LPLA stock to your portfolio amid the coronavirus crisis, given the strength in its fundamentals and inorganic expansion efforts. The company’s steady capital-deployment activities reflect a strong balance-sheet position.
Moreover, the company has been witnessing upward earnings estimate revisions lately, reflecting analysts’ optimism regarding its earnings growth potential. Over the past 30 days, the Zacks Consensus Estimate for earnings moved 3.1% and 2.2% upward for 2020 and 2021, respectively. The stock currently carries a Zacks Rank #2 (Buy).
Shares of LPL Financial have gained 1.4% in the past 12 months, underperforming the industry's 14.2% rally.
Mentioned below are some other factors that make LPL Financial stock an attractive investment option now.
Earnings Growth: Over the past three to five years, LPL Financial has recorded earnings growth of 40.7%. Though 2020 earnings are expected to be down 13%, the same is projected to be up 4% in 2021.
Moreover, the company has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 12.1%.
Revenue Strength: LPL Financial has been witnessing steady improvement in revenues. Over the past three years (ended 2019), total revenues witnessed a compound annual growth rate (CAGR) of 9.4%, mainly on rise in advisory revenues.
The momentum is expected to continue in 2020 and 2021, with sales projected to grow at a rate of 2.1% and 14.2%, respectively.
Strategic Acquisitions: LPL Financial has concluded several strategic deals over the past few years. In October, the company acquired Blaze Portfolio, while in August, it acquired the assets of E.K. Riley Investments, LLC and Lucia Securities. The company also acquired Allen & Company of Florida, AdvisoryWorld and certain assets and rights of National Planning Holdings in 2019, 2018 and 2017, respectively. These inorganic expansion efforts position LPL Financial well for growth.
Solid Balance-Sheet Position: As of Sep 30, 2020, LPL Financial had total debt worth $2.6 million, higher than the cash and cash equivalents and due from banks, along with a restricted cash balance of $1.54 billion. However, the company's total debt to total capital of 67% at the end of the third quarter improved sequentially and is below the industry average of 69.8%. This suggests that the company carries a relatively lesser credit risk and chances of its default in debt payments are likely to be lower even if the economic situation worsens.
Steady Capital-Deployment Activities: LPL Financial is committed toward enhancing shareholders’ value. The bank has been paying a regular quarterly dividend of 25 cents per share for the past several years. Considering yesterday’s closing price of $93.39 per share, the company's dividend yield currently stands at 1.1%.
Also, LPL Financial has a share-buyback program in place, which is currently on hold due to the pandemic-induced uncertainties. As of Sep 30, 2020, the firm had the authorization to purchase up to $349.8 million worth of shares. Thus, given the earnings strength and solid balance-sheet position, the company will likely be able to sustain current capital deployments.
Superior Return on Equity (ROE): LPL Financial’s trailing 12-month ROE supports its growth potential. The company’s ROE of 49.27% compares favorably with the industry’s 12.29%, reflecting that it is more efficient in using shareholders’ funds than peers.
Favorable Valuation: The company seems to be trading at a discount with respect to its price/cash flow (P/CF) and price/sales (P/S) ratios. Currently, it has a P/CF ratio of 9.76, which is below the industry average of 11.37. Also, its P/S ratio of 1.29 is lower than the industry average of 1.70.
Further, the stock has a Value Score of B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.
Stocks to Consider
Waddell & Reed Financial, Inc. WDR witnessed an upward earnings estimate revision of 6.7% for 2020 over the past month. Its shares have gained 3.9% over the past year. At present, it sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Federated Hermes, Inc. FHI has witnessed a 6.7% upward earnings estimate revisions for the current year over the past 30 days. This Zacks Rank #2 stock has lost 17.1% over the past 12 months.
Artisan Partners Asset Management Inc. APAM has recorded 1% upward earnings estimate revision for the ongoing year in the past 30 days. This Zacks Rank #2 stock has appreciated 52.1% over the past year.
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