Weekly Equity Idea Highlight - 2020 02 18
LPLA has significantly transformed their business returns, but the market is expecting the company to give operational improvements back.The market is expecting UAFRS-based (Uniform) ROA (ROA') to fade from 28% in 2018 to 20% in 2023, with Uniform Asset growth slowing to a modest 4% a year going forward.
The market does not think the company's improvement in Uniform ROA from 15%-20% levels historically to towards 30% is sustainable, and is expecting the company to see its operating leverage reverse.
The market does not appear to recognize that as LPLA has gained scale in both its legacy brokerage business and its platform business for RIAs and independent advisors and brokers, it will continue to see returns expand, not decline back to historic norms.
LPLA's management's compensation framework aligns them to focus on continuing to accumulate assets and advisors, and improving advisor experience to retain their assets. This is likely to drive to continued scale for the business, and thanks to the company's investment in technology, this scaling will not require incremental investment, driving returns higher.
Also, management has shown building confidence in the past two calls about their outlook. In both calls, management showed confidence about gaining assets and advisors, both organically and acquisitively. Equally as important, management repeatedly showed confidence when talking about the strength of their operating leverage as they add assets, and how they are seeing this play out currently.
Considering the market's disbelief in the sustainability of the company's strategy, but the company's strong operational framework, robust execution, management's appropriate alignment, and strong positive fundamental momentum for the company based on management's inflection in confidence, there appears to be material near-term and long-term equity upside for LPLA.
LPL Financial Holdings is a holding company. Through its subsidiaries, the company is engaged in the retail financial advice market and independent broker-dealer. The company's product and solution access includes: Commission-Based Products, which include variable and fixed annuities, mutual funds, equities, and insurance, among others; Fee-Based Advisory Platforms and Support, which include wrap-fee programs, mutual fund asset allocation programs, financial planning services, and retirement plan consulting services; and Cash Sweep Programs, which manage their clients' cash balances through a money market sweep vehicle involving money market fund providers and insured sweep vehicles involving banks.
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