Morningstar | Continued Revenue Growth at Raymond James More Important Than Sequential Earnings Dip
While net income took a small sequential dip during the June quarter, record revenue and assets at Raymond James should lead to stronger earnings down the road. We are maintaining our $96 fair value estimate for the no-moat firm, which we believe is fairly valued. The company earned net income of $232 million, or $1.55 per diluted share, on $1.84 billion of net revenue in its fiscal third quarter. While net revenue was up 13% year over year, it was up just 1% sequentially (with net income also declining 4% sequentially due to higher expenses in the wealth management segment related to recruiting and advisor conferences). At the end of the June quarter, the company had record client assets under administration of $754 billion and a record advisor headcount of 7,719--so we view the increased wealth management segment expenses as being well spent.While generally rising asset prices and interest rates have led to a positive trajectory for most of Raymond James' segments, capital markets has been weighed down by low fixed-income trading and tax credit fund syndication fees. With capital markets revenue accounting for less than 15% of total revenue, it isn't materially affecting consolidated results. Similar to peers, interest rate-related revenue has been a a primary earnings growth driver the past couple of years, but may experience slowing growth going forward. Across the investment services industry, client cash balances have been declining despite increased total client assets. During the past year alone, client domestic cash sweep balances at Raymond James have declined to $41.5 billion from $43.3 billion, despite invested assets for wealth management clients increasing to $720 billion from $632 billion. Raymond James' bank also has a loan/deposit ratio over 90%, which means loan growth may stall without an influx of deposits. Net interest margin expansion is also likely to slow as deposit funding costs increase.
Raymond James Financial is a bank holding company and financial holding company. Through its subsidiaries, the company is engaged in financial services activities. The company's segments include: Private Client Group, which provides financial planning and securities transaction services through a branch office network; Capital Markets, which conducts institutional sales, securities trading, equity research, investment banking and the syndication and management of investments that qualify for tax credits; Asset Management, which provides portfolio management and related administrative services for retail and institutional clients; and Raymond James Bank, N.A., which provides loans such as corporate loans.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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