RJF - Raymond James: Short-Term And Long-Term Prospects Are Favorable (Rating Upgrade)

2023-08-29 09:42:07 ET

Summary

• Raymond James Financial's recently released July 2023 operating numbers have positive read-throughs for the company's expected financial performance in the coming quarters.
• RJF recruited a new Head of Corporate Development, and this suggests that the company has the intention to be more active on the M&A front.
• I revise my rating for Raymond James Financial to a Buy, as I have a more favorable view of RJF's growth outlook for the near term and long run now.

Elevator Pitch

Raymond James Financial, Inc. (RJF) shares are rated as a Buy.

I previously analyzed RJF's valuations and its most recent monthly operating performance with my earlier article for the company written on September 29, 2022. The focus of my latest write-up is the bright prospects for Raymond James Financial in the near term and long run which are supportive of a Buy rating (rather than a Hold previously) for RJF. Raymond James Financial's July 2023 metrics offer positive read-throughs for the company's short term outlook, while M&A is likely to be a long-term growth driver for RJF.

Positive Read-Throughs From July 2023 Numbers

Last week, Raymond James Financial published an 8-K filing revealing the company's key operating data for the month of July this year.

RJF's clients assets under administration increased by +3% QoQ and +10% YoY in July 2023, while its financial assets under management expanded by +6% YoY and +2% QoQ in the previous month. In RJF's August 23, 2023 8-K filing, Raymond James Financial attributed the reasonably good AUM growth for the recent month to "equity market appreciation and strong advisor retention and recruiting."

On the other hand, the near term outlook for Raymond James Financial's capital markets business should be pretty decent. Even though RJF didn't provide any specific numbers for its capital markets business, the company did mention in its August 23 filing that its "investment banking pipeline remains healthy."

RJF's recently announced July 2023 metrics and business commentary are largely consistent with the company's views at its Q3 FY 2023 (YE September 30) earnings briefing .

At the company's most recent quarterly results call, Raymond James Financial disclosed that "we continue to compete very well" and "the pipeline is strong" when it comes to advisor recruiting. This explains why RJF's AUM has expanded meaningfully in July 2023. Separately, RJF shared at its third quarter earnings call that it has observed "green shoots" in "activity level, backlog, new deals" for its capital markets business.

Wall Street expects Raymond James Financial to register steady revenue growth and higher profit margins in the coming quarters. As per consensus data taken from S&P Capital IQ , RJF's YoY top line growth is projected to be +6.7% for Q4 FY 2023 (which is just slightly below +7.0% for Q3 FY 2023) before accelerating to +10.0% in Q1 FY 2024. The analysts also estimate the Raymond James Financial's normalized net margin might improve from 13.7% in Q3 FY 2023 to 16.4% and 16.8% for Q4 FY 2023 and Q1 FY 2024, respectively.

I am of the view that expectations of top line and margin expansion for Raymond James Financial are reasonable. This takes into consideration RJF's latest monthly numbers for July 2023 and the company's management comments at the recent third quarter results briefing.

RJF's M&A Growth Ambitions

RJF has done a fair amount of acquisitions in the past (chart presented below), and there are good reasons to believe that Raymond James Financial will be as active, if not more active, in the area of inorganic growth for the foreseeable future.

Raymond James Financial's Past M&A Transactions

RJF's latest move on the hiring front sends a clear message about the company's intention to expand via Mergers & Acquisitions or M&A. Suraj Tripathy, who was previously with Bank of America ( BAC ) for 17 years, was recently named as Raymond James Financial's new Head of Corporate Development in May this year. On his LinkedIn profile , Suraj Tripathy highlighted that his role at RJF is "identifying, sourcing, and executing M&A opportunities that represent strong cultural and strategic fits."

At RJF's May 2023 Analyst & Investor Day event, the company emphasized that its "strong balance sheet, having plenty of capital, plenty of cash, funding" puts it in a position to be "opportunistic" and stressed that "we still focus on looking for acquisitions." As of June 30, 2023, Raymond James Financial had $1,718 million of cash on the parent company's books, and this was significantly higher than RJF's internal goal of having $1,200 million in corporate cash (source: Q3 FY 2023 earnings call). In other words, there is excess capital that Raymond James Financial can deploy to fund future M&As as and when such opportunities emerge.

It is also reassuring to know that Raymond James Financial is much less likely to go on an acquisition spree without considering the potential targets' valuations. RJF noted at the company's Q3 FY 2023 earnings briefing that it was deliberating on potentially acquiring "a few assets in the asset management space" previously, but it eventually gave up on these M&A deal because it couldn't agree on the "pricing" of these targets.

The current consensus FY 2022-2027 revenue CAGR forecast for Raymond James is +6.4% (source: S&P Capital IQ) , which is lower than RJF's actual FY 2017-2022 top line CAGR of +11.5%. The modest revenue outlook (determined primarily on the company's organic growth potential) is one of the reasons for Raymond James Financial's undemanding valuations; RJF is trading at 10.9 times consensus forward next twelve months' normalized P/E, which is substantially below its 10-year mean P/E metric of 13.4 times as per S&P Capital IQ data.

Assuming that RJF can execute on a few value-accretive M&A deals in the next few years, there is upside to Raymond James Financial's top line growth prospects, which is expected to bring about a positive re-rating of the stock's valuations.

Concluding Thoughts

I have upgraded my rating for Raymond James Financial to a Buy, as I have turned bullish on RJF's prospects in the short and long term. The company's July 2023 operating numbers are pretty good, and Raymond James Financial has the intention of boosting its future growth via M&A.

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