October 6, 2015
By Janet Levaux, ThinkAdvisor
With active investor Richard McGuire snapping at its heels, the independent broker-dealer may have to up its game
LPL Financial (LPLA) experts share regular forecasts on market trends and strategy. These days, outsiders are busy predicting what could happen over the next year or so two weeks after the hedge fund group Marcato Capital took a 6.3% stake in the independent broker-dealer.
UBS downgraded its rating on LPL last week, helping to push its stock price down to about $36. It now trades near $39, down from its 52-week high of roughly $48.
“LPL’s stock price has languished,” said Chip Roame, head of Tiburon Strategic Advisors, a research and consulting group. That downward trend in its equity price may have prompted Marcato, which is led by Richard McGuire, to pounce.
On the other hand, sometimes activist investors like Marcato buy a stake with specific ideas in mind, “like selling off a business, recapitalizing a balance sheet or even selling the entire business,” Roame explains. “I think all of these are possible for LPL.”
That raises more questions, he says: “Would Wells Fargo Corporation or UBS buy up LPL?” Perhaps, but LPL also has the ability to recapitalize itself, since it has limited debt, Roame points out.
What the future holds for LPL Chairman and CEO Mark Casady is attracting a lot of conjecture these days.
At times, activists “want to replace management, believing the team needs new business ideas; in these cases, they will often suggest new executives,” said Roame, who thinks Casady is a “good leader.”
Others are more critical of Casady. His “glory days were before they went public, during their growth phase,” says recruiter Jon Henschen.
“Some company heads have skill sets more suited to their growth phase, such as Bill Gates with Microsoft,” Henschen explained. “Once a critical mass is reached, a new set of skills is needed which the longstanding head of the company may not possess and/or may not have an interest in obtaining.”
Since the IBD went public, it has seen “an almost continuous flow of litigation that is concentrated in REITs and leveraged ETFs,” explains Henschen.
Plus, the recruiter argues, based on input from LPL reps and from service surveys, the company’s service record is far from stellar, “which could partially be blamed on their enormous size but ultimately falls on the shoulders of their COO.”
(Henschen says he does not do recruiting work directly for LPL, though he does work with some of its advisor groups; the group Roame leads includes LPL on its lengthy client list, but it did not do any work for Marcato before it took a stake in the IBD, the consultant states.)
Most certainly, McGuire will push for stronger returns.
Right now, LPL’s sales have a five-year growth rate of 9.7%. Its earnings have a five-year growth rate of 30%, according to Reuters data. Meanwhile, its price-to-earnings ratio is 21. Its pretax margin stands at 7% for the past 12 months and 5.5% as its five-year average.
Rival broker-dealer Raymond James (RJF), by comparison, has a PE of 14.6. Its pretax margin is 15% on a 12-month basis and 13% on a five-year basis.
“LPL’s core commission business is slowing, as more advisors move to fee-based business,” Roame said. “But LPL sits in a great position to capture the hybrid advisors. Maybe Marcato believes more needs to be done quicker to grow in these areas.”
Plus, when interest rates rise, LPL and other BDs “should generate more revenues and profits quickly,” he states.
What should Casady and other LPL executives do?
“If I am LPL, I engage with the guy and hear their ideas,” Roame said. “As a shareholder, and a savvy one at that, I would fear less and hold conversations more with an open mind to jointly evaluate ideas.”’
For its part, the IBD says it keeps up “an active and ongoing dialogue with its investors and values their input as we work toward the common goal of driving stockholder value.”
Of course, McGuire and Marcato don’t have the friendliest of reputations. McGuire pressured NCR for weeks to give him a board seat, for instance, and was successful.
The hedge fund manager, though, has not been able to get the Bank of New York Mellon (BK) to push out CEO Gerald Hassell.