Broadridge Financial Solutions, Inc. (BR) released Q4 and FY2019 results and FY2020 guidance on August 1, 2019.
BR's share price has retraced from its late July 2019 level and in this article I look at whether the current valuation based on FY2020 guidance presents a buying opportunity.
In my opinion, the current market environment is one in which investors need to practice patience. This article includes words of wisdom from highly successful investors on the topic of patience.
- Broadridge’s core business is consistently profitable.
- BR has made 3 very recent tuck-in acquisitions. BR views growth by acquisition as an ongoing component of its growth and it has extensive experience at integrating newly acquired businesses.
- BR has consistently demonstrated a balanced and long-term approach to its capital stewardship.
- The recently announced ~11.34% increase in BR’s dividend marks the 8th consecutive double digit percentage increase and BR’s annual dividend has increased for the 13th consecutive year since becoming a public company in 2007.
I readily admit that waiting for valuation levels to retrace to ranges I view as reasonable is like watching paint dry and is not enjoyable. Quite frankly, for the last several months I have been frustrated. I keep hoping for a return to more reasonable valuations but even with the recent broad market pullback I still find the valuation of many companies that appeal to me as being elevated.
This is when I turn to the teachings of successful and wise investors and pay heed to their messages about PATIENCE. I provide some of these messages below.
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring” George Soros
“Price is what you pay. Value is what you get. Whether we are talking about socks or stocks I like buying when quality is marked down” Warren Buffett
“The single most important skill for being a good investor is to be very content with not doing anything for extended periods and that’s perfectly fine” Mohnish Pabrai
“The world is full of foolish gamblers and they will not do as well as the patient investors.” Charlie Munger
"Patience can produce uncommon profits." Philip L Carret
“Patience is essential.” Howard Marks
"It is possible to make money— and a great deal of money—in the stock market. But it can't be done overnight or by haphazard buying and selling. The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator." J Paul Getty
"I think the record shows the advantage of a peculiar mind-set - not seeking action for its own sake, but instead combining extreme patience with extreme decisiveness" Charlie Munger
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” David Tepper
“Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it’s time.” Charlie Munger
"I consider patience to be the most important ingredient for success in the market." Francois Rochon
“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.” Warren Buffett
“People always want investments to go up like a line.…That’s just not reality. You make 80% of your money in 20% of the time in investing and you have to be patient.” Jeffery Gundlach
"[There] is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens." Phil Fisher
“One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do” James Rogers
“Patience, patience and more patience. Ben Graham said it, but it is true of all investment disciplines, not only value investing, although it is indispensable to that.” Peter Cundill
“Inaction and patience are almost always the wisest options for investors in the stock market.” Guy Spier
“Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. But, in the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money: It pays to be patient and to own successful companies” - Peter Lynch
This brings me to the subject matter of Broadridge Financial Solutions, Inc., (BR), a company in which I have exposure within ‘Side Accounts’ in the FFJ Portfolio and in accounts for which I do not disclose details.
I have been a BR shareholder since the day this company was spun off from Automatic Data Processing, Inc. (ADP). I am of the opinion there are significant future growth opportunities for this company and intend to acquire additional shares…at the right valuation.
In my previous BR article I reviewed Q3 results and guidance. Subsequent to that article, BR’s share price rose to ~$135. With the recent broad market pullback, however, shares have retraced to $123.60.
Now that BR has released Q4 and FY2019 results and FY2020 guidance on August 6, 2019, I take this opportunity to determine whether BR’s valuation based on FY2020 guidance is sufficiently attractive to warrant the purchase of additional shares.
Q4 and FY2019 Results
In FY2019, BR’s recurring fee revenues rose 6% to $2.759B. This increase more than offset the decline in low to no margin distribution revenue and lower event-driven revenues.
On an annual basis, total revenue rose 1% to $4.362B. With strong margin expansion, adjusted operating income rose 8% and adjusted EPS rose 11%.
BR continues to fund investments in new products and technologies and in FY2019 it made tuck-in acquisitions that will strengthen and grow BR’s Wealth Management business; Press Releases announcing these tuck-in acquisitions can be found here, here, here, and here.
BR invested ~ $0.55B into the business with the biggest use of cash being for these acquisitions. It invested ~$0.4B to acquire RPM, Rockall and the TD Assets, with $0.35B of an aggregate purchase price coming from cash; another ~$0.043B will be paid in Q1 FY2020.
BR’s management expects modest EPS contribution in FY2020 from these recent acquisitions but anticipates attractive returns over time.
BR’s FY2020 guidance is reflected below.
Management expects recurring fee revenue growth of 8% - 10%, which includes organic growth of 5% - 7% and ~ 3% coming from Q4 acquisitions (Rockall, RPM, and the acquisition of retirement plan custody and trust assets from TD Ameritrade Trust Company).
This growth will be driven mostly by acceleration of growth in BR’s Global Technology and Operations (GTO) segment. GTO's recurring revenue growth is expected to be in the mid-teens as a steady stream of new client onboardings should increase full year organic growth rate to mid- to high single-digits levels.
RPM, a $40 - $50 million revenue business and Rockall, a $10 - $15 million revenue business will contribute the balance of GTO’s growth.
The Investor Communication Solutions (ICS) segment of BR’s business is expected to experience mid-single-digit organic growth driven by continued growth in BR’s data and analytics product lines. This growth will be partially offset by relatively flat top line performance in customer communications.
Total revenue growth of 3% - 6% is projected as BR expects low-margin distribution revenues to be roughly flat, or to contract, thus weighing on total revenue growth. BR also expects a ~5% - ~15% decline in event-driven revenue and FX losses are expected to widen at a rate greater than recurring growth with the addition of more non-U.S. revenue.
Adjusted operating income margin of ~18%, up from 17% in FY2019, is projected. This is relatively in line with BR’s target of a 50+ bps per annum increase. The margin expansion is being driven by higher recurring revenues and modest expense growth, offset in part by lower event-driven revenues. This means BR is targeting high single digit or better growth in adjusted operating income.
Increased leverage is expected to result in higher interest expense.
The overall tax rate should be steady at 21% as BR’s core tax rate which excludes the excess tax benefit, remains unchanged at 24%; BR is projecting an excess tax benefit of $20 million which is relatively similar to $19.3 million reported in FY2019.
Adjusted EPS growth of 8% - 12% is projected with the repurchase of shares in Q4 generating a modest benefit to EPS.
On the August 6th earnings call, management reminded call participants that event fees were up 30% in Q1 2019 and represented the largest quarter for event-driven fees in FY2019. Management expects Q1 2020 event fees to contract by ~30% - ~35% to a more normalized level which will impact Q1 2020 EPS. With the normalization of event-driven revenues, management is of the opinion Q1 2020 EPS is likely to be consistent with the ~13% of FY2020 adjusted EPS. (cont'd.)
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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.