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Broadridge Financial Solutions (BR) released its Q2 and first half 2019 results on February 7, 2019. Without listening to the underlying reasons why results did not meet consensus expectations, Mr. Market knocked ~$10 from BR's share price.

Shares recovered somewhat by the end of the day but this is a classic example of how many investors pay little attention to how a company has truly performed.

In this article I look at whether the share price pullback presents an attractive buying opportunity for long-term shareholders.

 

Summary

  • BR’s shares were grossly overvalued in August/September 2018 and the share price has subsequently retraced by just over 30% from the 52 week high.
  • Q2 2019 and 1H 2019 results were released February 7th and the share price took a ~6.7% hit from the previous day’s close.
  • The vast majority of investors make investment decisions without looking into the underlying reason why quarterly results have not met street consensus.
  • The company is still on track to meet FY2019 targets and management has reaffirmed full year guidance.
  • ~70% of full year earnings is generated in the second half.

Introduction

In recent articles I have indicated that I am of the opinion that within the short-term we can likely expect overall market weakness with pullbacks becoming increasingly probable or at the very least sideways price action.

I have written a few articles in which I have disclosed that I have written short-term out-of-the-money covered calls where I am of the opinion that a company’s share price is likely to pullback or likely to trade in a narrow range in the short-term. My most recent such article was on Becton Dickinson.

In other cases, a company releases earnings and Mr. Market comes to the quick conclusion that all is not well with the company and promptly punts the company to the curb. In these cases I like to step in and acquire beaten up shares in great companies. I disclosed a recent example of this in my February 5th Church & Dwight (CHD) article.

Here we are on February 7th and Broadridge Financial Solutions’ (BR) share price has pulled back following the release of Q2 and 1H 2019 results. Before the conference call was even held to discuss results the shares had tanked to ~$94 from the previous day’s close of $103.54!

As a BR investor from the day it was spun off from Automatic Data Processing (ADP) in 2007 I have closely followed the company over the years. I have written articles in which I have recommended BR and others in which I have recommend investors hold off on acquiring shares. In essence, I am not trying to flog BR. In fact, in my July 16, 2018 article for subscribers I indicated that Sometimes You Just Have to be Patient. as I viewed BR shares to be richly valued.

I followed up that article with this August 7, 2018 article for subscribers in which I concluded with:

'I think Mr. Market has bid up the price to a level where perfection is expected. At some stage, I envision BR will retrace to a more reasonable valuation; I do not expect BR to retrace to a PE in the teens but somewhere between the low – mid 20s seems more reasonable.

As much as I like the company I just can’t bring myself to acquire more shares at this stage.'

By the time I wrote my November 6, 2018 article, BR’s share price had retraced from its lofty valuation of the summer of 2018 to the point where I suggested investors give a very serious look at acquiring BR shares since they had become more fairly valued; BR’s share price had retraced to ~$105 from its ~$138 high.

Subsequent to that November article, BR’s share price got caught up in the broad market pullback in December and retraced further to the ~$91.80 level on December 24th. The share price, however, quickly retraced to the ~$103.50 level by early February.

Now that I have had a chance to review the February 7th Q2 and 1H 2019 earnings release and earnings presentation and to read the transcript of management’s call with analysts I am taking this opportunity to revisit BR.

While it certainly is nice to know that BR has very recently been named to Fortune Magazine’s list of the World’s Most Admired Companies in the category of financial data services for the 6th time and that for the first time it has received the top ranking in the financial data services category, I am more of a ‘show me the money’ type of investor. (cont’d.)

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Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long BR.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.