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Following my February 2, 2022 post in which I deemed Broadridge (BR) to be reasonably valued based on Q2 and YTD results released on February 1, 2022, BR's share price has tumbled to ~$138. BR has also released Q3 and YTD results on May 3, 2022 which includes a slight increase in the lower end of its FY2022 adjusted diluted EPS growth guidance.
I liked BR's valuation when I added to my position in early February 2022. Now, I like its valuation even more. Therefore, I added to my position in a 'Core' account within the FFJ Portfolio on May 9 by acquiring 30 shares at $138.43. The purchase is rather small since I also deployed funds to acquire shares in other existing holdings.
Let's have a quick look at BR.
Overview
Investors who are unfamiliar with BR are encouraged to read Part 1 Item 1 in the FY2021 Form 10-K.
The March 2022 Investor Presentation also provides a good overview of the company.
Financials
Q3 2022 and YTD Results
I provide these links to assist you with your analysis: Q3 2022 10-Q, Q3 Earnings Release, and Q3 Earnings Presentation.
On the earnings call, management stated that strong sales results have BR on track to achieve another year of record closed sales.
BR's adjusted EPS growth is in line with guidance and three-year objectives.
In contrast, the following were BR's YTD results at the end of Q2 2022.
Outlook
BR anticipates a strong Q4 despite increased volatility as the world copes with rising inflation, higher rates, the slowdown in China and the Russian invasion of Ukraine.
Management now expects FY2022 recurring revenue at the high end of guidance with continued margin expansion and with adjusted EPS growth of 13% - 15%.
Source: BR - Q3 2022 Earnings Presentation - May 3, 2022
The following is BR's guidance provided at the end of Q2 2022.
Source: BR - Q2 2022 Earnings Presentation - February 1, 2022
As with most other companies, BR continues to experience a modest impact from higher labour inflation. Management continues to be confident efficiencies will offset these additional costs.
Free Cash Flow (FCF)
BR's FCF typically recovers in the second half of every fiscal year with FY2011 - FY2021 FCF coming in at (in millions of $) 167, 238, 220, 334, 365, 362, 312, 556, 544, 500, and 539.
YTD FCF is ($68.4 million) versus $136.3 million for the first 9 months of FY2021 and FY2022's FCF results will be weaker than historical levels. This is because BR is in a peak period of investment across multiple client platform and in particular, its wealth management platform; in the first 9 months of FY2022, BR has invested $54 million in CapEx and software and $0.35B in its platforms.
Looking at the Condensed Consolidated Statement of Cash Flows, the YTD 'Net cash flows (used in) provided by operating activities' amounts to ($13.9 million) versus $189.5 million for the first 9 months of FY2021. A major reason for the YTD negative value is the $0.515B increase in Other non-current assets. Included in Other non-current assets are 'Deferred Client Conversion' and 'Start-Up Costs'. These are direct costs incurred to set up or convert a client’s systems to function with BR's technology. They are generally deferred and recognized on a straight-line basis over the service term of the arrangement to which the costs relate, which commences when the client goes live with the Company’s services.
Management expects lower investment, as it completes the wealth management platform build and begins to recognize revenue from its UBS contract in mid-calendar 2023.
Once BR moves past its current investment phase, FCF conversion is forecast to revert to historical levels.
Credit Ratings
BR remains focused on debt reduction and maintaining an investment-grade credit rating.
All BR's domestic senior unsecured debt ratings are the top tier of the lower-medium grade investment-grade category.
- Moody's: Baa1 with a negative outlook;
- S&P Global: BBB+ with a negative outlook;
- Fitch: BBB+ and stable.
These ratings define BR as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Even if Moody's and S&P Global downgrade BR one notch, the definition reflected above still applies.
While the possibility of a downgrade in credit ratings is disappointing, management indicated on the Q3 earnings call that the focus remains on debt repayment and the maintenance of an investment-grade credit rating.
I view BR's credit risk as acceptable for my purposes.
Dividend and Dividend Yield
We see from BR's dividend history that it distributed its 3rd $0.64/share quarterly dividend on April 5, 2022.
In mid-June, I expect the 4th quarterly $0.64/share dividend will be declared. I then envision a ~$0.05/share dividend increase will be announced in mid-September. If this does transpire, investors can expect the next 4 quarterly dividends to total $2.71 (1 @ $0.64 and 3 @ $0.69). Using my recent ~$138.43 purchase price, the projected forward dividend yield is ~1.96%. This level is superior to the dividend yields at the time of my previous posts.
The weighted average diluted shares outstanding in FY2011 - 2021 was 128.3, 127.5, 125.4, 124.1, 124, 121.6, 120.8, 120.4, 118.8, 117, and 117.8 (millions of shares); this increased to 118.3 in Q1 2022, reduced to 117.6 in Q2, and increased to 118.5 in Q3.
Negligible share repurchases are being made as BR works toward reducing the debt used to acquire Itiviti.
Valuation
My last major BR purchases were in November 2018 and February 2019.
At the time of my November 2018 purchase, BR's share price had retraced to ~$105. Based on reaffirmed guidance, BR’s forward PE was ~25.4 - ~26.3 and its forward adjusted PE was ~22.2 - ~22.98.
In February 2019, guidance had just been reaffirmed and using the ~$95.80 share price, the forward PE range was ~23.2 - ~24 and its forward adjusted PE range was ~20.3 - ~20.96.
In early December 2021, shares were trading at ~$171 and broker guidance was:
- FY2022 - 8 brokers - mean of $6.43 and low/high of $6.22 - $6.65. Using the mean, the forward adjusted diluted PE is ~26.6.
- FY2023 - 8 brokers - mean of $7.05 and low/high of $6.89 - $7.31. Using the mean, the forward adjusted diluted PE was ~24.3.
- FY2024 - 3 brokers - mean of $7.46 and low/high of $7.35 - $7.55. Using the mean, the forward adjusted diluted PE was ~23.
When I purchased shares in early February @ ~$151, the forward adjusted diluted PE based on current broker guidance is:
- FY2022 - 8 brokers - mean of $6.40 and low/high of $6.22 - $6.50. Using the mean, the forward adjusted diluted PE is ~23.6.
- FY2023 - 8 brokers - mean of $7.08 and low/high of $6.90 - $7.32. Using the mean, the forward adjusted diluted PE was ~21.3.
- FY2024 - 3 brokers - mean of $7.42 and low/high of $7.35 - $7.54. Using the mean, the forward adjusted diluted PE was ~20.4.
Using my $138.43 purchase price on May 9 and current broker guidance, the forward adjusted diluted PE levels are:
- FY2022 - 8 brokers - mean of $6.45 and low/high of $6.31 - $6.50. Using the mean, the forward adjusted diluted PE is ~21.5.
- FY2023 - 8 brokers - mean of $7.06 and low/high of $6.88 - $7.32. Using the mean, the forward adjusted diluted PE was ~19.6.
- FY2024 - 5 brokers - mean of $7.55 and low/high of $7.37 - $7.85. Using the mean, the forward adjusted diluted PE was ~18.3.
Final Thoughts
I have been a BR shareholder since it was spun-off from Automatic Data Processing (ADP) on March 30, 2007. Over the years, I have witnessed BR streamline its operations and expand into
adjacent markets; it has completed at least 25 acquisitions since 2010.
At its December 2020 Investor Day, BR laid out its three-year annual growth objectives; BR is currently on track to achieve these objectives.
I like BR's long-term prospects and have increased my exposure over time. When I completed my January 7, 2002 Investments Holdings Review, it was my 19th largest holding; in mid-April 2021 it was my 22nd largest and in mid-August 2020 it was my 18th largest.
In early February 2022, I acquired 200 additional shares in a 'Core' account in the FFJ Portfolio. Now that BR's valuation is even more attractive, I have increased my exposure even further.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long BR and ADP.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
