LPL campus in San Diego. LPL campus in San Diego.

LPL Financial reported adjusted earnings on Thursday of $1.11 per share for the period ending March 30, beating analysts’ estimates. Its pre-adjusted earnings were $94 million, or $1.01 per share, vs. $48 million, or $0.52 per share, a year earlier and $64 million, or $0.69 per share, in the prior quarter.

“We started 2018 with another quarter of business and earnings growth,” said Dan Arnold, president and CEO, in a statement. “Looking ahead, our strategic priorities remain growing our core business and executing with excellence.”

But at least one analyst is having a hard time seeing what the independent broker-dealer — which bought the broker-dealer assets of National Planning Holdings late last year — can do to maintain this growth pace.

“Ultimately, our long-term concern is that the company is not strategically well positioned in an advisory world that is increasingly moving to lower fees, digital advice married with holistic financial planning, and fee-only business models,” said William Blair’s Chris Shutler, CFA, in a report on the company after its earnings release.

Moreover, if it were not for interest rate increases and NPH, underlying organic growth trends would not look all that exciting,” Shutler added. “We maintain our Market Perform rating and will update our model in the coming days.”

The analyst points out that while 941 former NPH advisors came on board in early 2018, LPL lost 84 net advisors.

On a conference call with equity analysts, Arnold explained that the net loss of reps was “primarily due to a large number of low-producing advisors who did not renew their licenses, and many exited the industry.”

These trends have “creating some noise, if you will, with respect to advisor counts in the quarter” for the IBD, Arnold says.

“Production retention was solid at 96%, however,” Shutler stated in his recent note on LPL. But how long will that last?

“With NPH, one-third of transition assistance was paid in cash, and two-thirds was forgivable loans with an average vesting period that we calculate at 2.5-3 years; given this short time frame, we have some concern about further NPH attrition in 2019 and 2020,” Shutler explained.

Overall, the company’s new recruiting offer in the market “is also quite aggressive,” he noted, at 50 basis points on advisory business with a three-year vesting period.

According to Shutler, higher transition assistance and short forgivable-loan vesting periods should boost recruiting numbers “a bit later this year,” but “the fact that more aggressive offers need to be made highlight the company’s challenges.”

Momentum for LPL depends on it continuing to “roll up” the broker-dealer industry, the analyst says. However, the William Blair equity team does “not see additional large-scale deals coming as inexpensive as NPH, and the M&A thesis is no secret.”

Another analyst though, disagrees.

“LPL remains the largest player in the independent retail brokerage space and benefits from numerous scale advantages in an in an uncertain regulatory environment,” explained Ann Dai, CFA, of Keefe, Bruyette & Woods in a recent note.

The IBD benefits from higher interest rates, according to Dai, and the integration of NPH assets “should create new growth drivers for the firm over the intermediate term, as does the potential for incremental M&A,” she explained.

KBW has an Outperform rating on the stock, which has risen from about $40 per share in July 2017 to roughly $60 today.

“Going forward, our capital allocation priorities remain investing for organic growth, taking advantage of M&A opportunities if they arise, and returning capital to shareholders,” Chief Financial Officer Matt Audette said in a statement.

 

Earlier this week, LPL struck a deal with state regulators in which it agreed to repurchase certain unregistered securities from investors (sold since 2006) and pay up to $26 million in penalties.

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