Contents
Broadridge Financial Solutions, Inc. (BR) released Q1 2020 results and reiterated FY2020 guidance on November 6, 2019.
I remain confident in BR's long-term growth and profitability prospects.
Summary
- Broadridge reported weaker Q1 results than in Q1 2019 but this is because it benefited from a proxy campaign at a significant mutual fund complex in Q1 2019.
- BR continues to increase the extent to which recurring revenue is generated.
- Tuck-in acquisitions continue to be made with $0.179B in tuck-in M&A investments made YTD across governance, capital markets, and wealth management.
Introduction
Broadridge Financial Solutions, Inc., (BR), is a company in which 504 shares are currently held within a ‘Side Account’ in the FFJ Portfolio and additional shares are held in an account for which I do not disclose details.
In my August 7th article at Financial Freedom is a Journey I indicated ‘I would be looking to increase my position if BR drops to $115 (or lower)’ but indicated this is not a hard and fast dollar value.
Well…with the recent pullback in BR’s share price following the November 6th release of Q1 2019 results, I added to my existing position in the account which currently holds BR shares for which I do not disclose details.
If BR is a company with which you are unfamiliar, I highly encourage you to read the Business and Risk Factors components of BR’s FY2019 10-K to obtain a good overview of BR’s business, strategy, clients, competition, etc.
Q1 2020 Results
BR’s Q1 results can be found in its November 6th Earnings Release, Earnings Presentation, and in the Q1 2020 10-Q.
BR reported record Q1 sales and it completed tuck-in acquisitions across each of its franchises so as to strengthen the company and to drive long-term growth.
While some investment articles in cyberspace indicate that BR missed earnings and revenue estimates, they may have neglected to reflect that Q1 is typically the weakest quarter. In fact, BR typically generates only 12% - 14% of its full year adjusted EPS in Q1 and this is right where BR ended this past quarter.
In addition, in Q1 2020 BR did not benefit from event-driven activity and corresponding revenue as it did in Q1 2019; event-driven revenues declined significantly because in 2019 BR benefited from a proxy campaign at a significant mutual fund complex. It is important to remember that event-driven fee revenues carry significant levels of incremental profitability as they leverage an existing cost infrastructure.
In addition to organic growth it is important that investors take note that BR continues to make headway in increasing the degree of recurring fee revenue. While Q1 has historically been weakest quarter, look at page 7 of the Earnings Presentation. Here we see the extent to which recurring revenue relative to total revenue increased relative to Q1 2019. Naturally, the greater the degree of recurring (auto-pilot) revenue the better management can deploy its resources toward generating incremental business.
Slide 6 of the Earnings Presentation reflects how active BR has been on the tuck-in acquisition front. In fact, acquisitions are an integral part of BR’s capital stewardship and investment strategy and are tightly aligned with the franchise strategy.
On the governance side of BR’s business, the strategy is to build the next generation of governance communications and to expand services across the governance network. BR has, in fact, invested more than $0.3B in the past 24 months to help accelerate this strategy. It significantly extended the data-driven solutions business with the relatively recent Fi360 acquisition and the purchase of TD Ameritrade assets.
BR has also added to its issuer product suite, broadened its regulatory communications footprint, and strengthened its digital capabilities.
On the wealth side of the business, BR is creating the open architecture solution of the future for investors, advisers and operations with its largest acquisition being that of RPM Technologies. This acquisition strengthened BR’s wealth business in Canada and extends its capabilities to integrate banking into wealth management. BR has also acquired new capabilities around securities-based lending, and most recently, adviser compensation.
Growth in the capital markets segment of the business has been mostly organic but in October, BR acquired Shadow Financial Systems so as to broaden its presence into new asset classes, including exchange-traded derivatives and cryptocurrencies.
In a nutshell, strategic acquisitions will continue to be a normal course of BR’s business. The expectations are that acquisitions will continue to deepen BR’s relationships with key clients, allow it to acquire talent, and bring new capabilities which it can use to generate additional business. In fact, on the Q1 2020 call with analysts, BR indicated these investments should contribute ~$0.175B of FY2020 recurring revenue.
I pay particularly close attention to a company’s Free Cash Flow (FCF) as this provides management with flexibility. While BR generated $0.1067B of negative FCF in Q1, this quarter is typically a negative FCF quarter; looking at slide 15 of the Q1 Earnings Presentation we see that BR generated $0.111B in negative FCF in the first 3 months of FY2019.
On the leverage front, BR’s leverage ratio using adjusted debt-to-EBITDAR at September 30 was 2.2x, and a slight uptick is anticipated in Q2, reflecting the $0.120B purchase price for Fi360. This temporary spike above the long-term target of 2.0x is a result of the seasonally negative Q1 free cash flow and the timing of M&A closings.
There has been no change to BR’s capital allocation strategy and leverage target and BR has historically benefitted from the seasonally stronger free cash flows in the second half of the year. BR is confident it will delever and generate additional flexibility to pursue attractive tuck-in M&A opportunities and/or repurchase shares, while finishing the year in line with its 2.0x leverage target.
NOTE: EBITDAR can be calculated as EBITDAR = Net Income + Interest + Taxes + Depreciation + Amortization + Rent/Restructuring
It is useful for companies undertaking restructuring efforts since restructuring charges are typically one-time or non-recurring expenses. Removing the restructuring costs shows a clearer picture of the operating performance of the company and perhaps might help with obtaining financing from a creditor.
Looking at BR’s Q1 2020 Balance Sheet we see $0.399B appearing as a current portion of long-term debt. This is because BR has $0.4B in senior notes coming due in September 2020. BR has indicated it will consider opportunistically raising additional debt capital at some point over the next couple of quarters in order to appropriately manage upcoming maturities while keeping in mind plans to grow via acquisition.
FY2020 Guidance
BR’s FY2020 guidance is reflected below.
Source: BR – Q1 2020 Earnings Presentation – November 6, 2019
On the Q1 earnings call management reiterated that BR remains on track to deliver another strong year of top and bottom line growth. Closed sales are expected to be strong and 8% - 10% recurring fee revenue growth and 8% - 12% adjusted EPS growth for the fiscal year are expected. With this outlook it appears BR will deliver on the 3-year growth objectives shared with the investment community at its 2017 Investor Day.
Management has indicated that ongoing industry trends have brought increased evidence that the financial services industry is facing significant structural cost pressures. Examples of this include moves by online brokers to slash trading commissions and by global banks realigning their strategic focus.
Regulatory change remains the constant with the SEC moving rapidly to implement Regulation Best Interest and the moves in Europe towards The Shareholder Rights Directive are a couple of the challenges helping drive BR’s growth. Financial services firms must move rapidly to adapt their businesses and evolve how they serve their clients which is causing them to embrace industry solutions to mutualize critical non-differentiating functions, to tap into more and better data, and to raise the effectiveness of their communications.
Credit Ratings
There has been no change to BR’s credit ratings from Moody’s and S&P Global subsequent to my last article and the credit ratings are not under review.
Moody’s continues to rate BR’s long-term debt as Baa1 which is classified as lower medium grade. Standard & Poor’s continues to rate the debt BBB+ which is also lower medium grade.
These ratings are satisfactory for my purposes.
Valuation
BR’s valuation at the time I wrote previous articles can be found in my August 7th article at Financial Freedom Is A Journey.
We see from BR’s August 1, 2019 Earnings Release that BR generated FY2019 diluted EPS of $4.06 and adjusted diluted EPS of $4.66. When I wrote my August 7th article, BR was trading at $123.60 thus giving us a forward diluted PE of ~30.44 and a forward adjusted diluted PE of ~26.52.
With BR continuing to project FY2020 diluted EPS growth of 5 - 9% we arrive at a projected range of ~$4.26 - ~$4.43. Using the current $120.48 share price we get a forward diluted PE of ~27.2 - ~28.28.
Using FY2020 adjusted EPS projections of 8 - 12% we get a range of ~$5.03 - ~$5.22 giving us a forward adjusted diluted PE range of ~23.08 - ~23.94.
In my previous article I wrote:
‘As much as like BR as a long-term investment I will wait for BR’s valuation to become more attractive. I would like to see BR’s share price retrace to a level where the forward diluted PE range is ~26 or lower and the forward diluted adjusted PE range is ~22 or lower.
Using FY2020 diluted EPS guidance of ~$4.26 - ~$4.43, a forward PE of ~26 AND using FY2020 adjusted diluted EPS guidance of ~$5.03 - ~$5.22 and a forward adjusted PE of ~22, I would be looking to acquire shares at ~$115 or less.’
BR’s share price dropped pretty close to this level which is why I acquired more shares.
Despite the uptick in BR’s share price on November 7th to $120.48, I think BR stands a good chance of being worth far more several years from now. Depending on your investment time horizon and other personal factors, I think acquiring BR shares for the long-term at the current level is not a bad decision.
I am puzzled as to why BR does not keep the dividend history segment of its website current. The company’s site reflects the most recent dividend as being $0.365 and having been paid July 3, 2018. As a long time BR shareholder I know that BR’s quarterly dividend has been increased twice subsequent to what the company’s website reflects. A more accurate dividend history can be found here and below.
Source: BR - FY2019 10-K
Subsequent to BR’s June 30th fiscal year end, it announced an increase to its quarterly dividend to $0.54/share. This provides investors with a ~1.8% dividend yield on the basis of the current $120.48 share price.
Yield hungry investors will likely pass on BR given this low yield but as an investor desiring a well balanced portfolio, I am prepared to invest in low dividend yielding stocks if I have a reasonable degree of confidence that the company’s share price will appreciate in value over the long-term.
You will also note from the image above that the diluted weighted average number of shares outstanding is declining very gradually. Given that BR is in growth mode, I would not expect a significant reduction in the number of shares outstanding as a reduction in share count is not a strategic priority.
Final Thoughts
I have been a BR shareholder since it became a publicly trade entity in March 2007. Over this timeframe I have had the opportunity to read several earnings call transcripts, 10-Qs, 10-Ks, and Earnings Presentations. Not once have I walked away wondering why the company is not executing on the strategy being communicated to the investment community.
I fully intend to remain a long-term shareholder and my plan is to continue to periodically acquire shares as funds permit and depending on what other investment opportunities are presented.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
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.
