- In the long term, B. Riley Financial’s revenue is expected to grow at a CAGR of high-single digits.
- The company's capital markets and wealth management businesses will drive its long-term revenue growth.
- Investors with a long-term time horizon can buy the company’s shares around the current price.
B. Riley Financial, Inc. ( RILY ) is a high-growth financial services platform. In the next five years, the company’s revenue is expected to grow at a CAGR of high single-digits driven by its investment banking and wealth management services. I expect current macro-weakness in terms of inflation will be okay in a couple of years, which will drive capital market activities higher in the long term. This will propel RILY’s revenue growth at an attractive rate (at a CAGR of 9% in the next five years). Long-term growth-oriented investors can buy RILY’s shares around the current price to maximize their gain.
B. Riley Financial is a diversified financial services company. The company invests in companies or assets with attractive risk-adjusted returns to benefit its shareholders. The company offers its clients financial services in the areas of investment banking, corporate finance research, trading and advisory, and wealth management.
Growth Drivers
Capital Markets business
RILY’s primary growth driver is its capital markets business. This business includes investment banking, corporate finance, financial advisory, market research, and trading services. The company offers more specialized customized services for its clients compared to its competitor companies. For this reason the company performs well in competitive environment. RILY’s investment banking business primarily drives its capital markets business revenue growth. However, the current macroeconomic weakness acts as a short-term obstacle for the company’s investment banking business. I believe this is the time to buy RILY’s stock for future gain. The company offers its investment banking services primarily to high-growth small- and mid-cap companies, since these companies provide significant M&A, spin-off and fund-raising activities. I expect these activities will generate strong growth once the macro-concern is over. This will boost RILY’s overall revenue growth. The company’s financial advisory, market research, and trading services remain stable, and are poised for higher growth once the inflationary pressure gradually fades out.
Wealth Management Business
RILY’s wealth management business is its another growth driver. Under the wealth management umbrella the company offers investment strategies, executive services, retirement plans, tax services, and settlement solutions. The company’s wealth management solution is differentiated compared to competitor companies because the company offers unique market insights to provide unbiased guidance for making strong financial decisions. In addition, the company offers education to its clients and clients become well-informed before making any financial decision. In this way, they protect and grow their capital.
I expect RILY’s wealth management business will drive its long-term revenue growth. According to a report :
The global wealth management market size was valued at $1.25 trillion in 2020, and is projected to reach $3.43 trillion by 2030, growing at a CAGR of 10.7% from 2021 to 2030.
RILY’s wealth management business should also grow at a similar rate.
Competition
RILY belongs to a highly competitive industry. Its competitors include BGC Partners ( BGCP ), StoneX Group ( SNEX ), Cowen ( COWN ), Piper Sandler Companies ( PIPR ), and Perella Weinberg Partners ( PWP ). RILY competes with these companies on the basis of breadth of its business platform, customer service, and price.
RILY’s primary competitive advantage is that it releases new and innovative products for its clients at regular intervals. As a result, the company wins new customers and retain existing customers. The company is engaged in incremental innovation, which unlocks new value for its shareholders. The company acquired FocalPoint Securities earlier this year, which is its another competitive advantage. FocalPoint Securities is an independent investment bank. The acquisition has resulted in significant expansion of RILY’s mergers and acquisitions advisory business. Both the competitive advantages will lead to significant revenue growth for the company.
Second Quarter 2022 Results
The company reported second quarter 2022 operating revenues of $266.6 million, down 12.5% year-over-year. The company’s GAAP net loss for the quarter came in at $142.2 million, and operating adjusted EBITDA came in at $74.2 million.
RILY delivered okay results for the second quarter of 2022. The company’s non-cyclical businesses performed well. The company reported markdown on its investments, and its underwriting business was unable to grow. However, despite this, the company’s dynamic platform has shown continued resiliency. The company has earned over $17.00 per share for its shareholders since 2019. The company’s operating EBITDA came in at $366 million over the trailing twelve-month period, compared to $114 million in 2019, which resulted in significant earnings for shareholders.
The company’s aim is delivering recurring EBITDA growth. To achieve this, the company depends on less cyclical and less episodic businesses. Such businesses helped the company generate more capital to support dividend, and the company delivered a $1 dividend to shareholders during the second quarter of 2022. I expect the company will offer a higher dividend in the coming years driven by recurring EBITDA growth.
Valuation
RILY’s competitors include BGC Partners, StoneX Group, Cowen, Piper Sandler Companies, and Perella Weinberg Partners.
RILY | BGCP | SNEX | COWN | PIPR | PWP | |
TTM Price to Sales | 1.74x | 0.81x | 0.03x | 0.76x | 0.99x | 0.43x |
TTM Price to Book | 3.23x | 2.24x | 1.74x | 1.03x | 1.74x | 2.40x |
TTM Price to Cash Flow | 10.59x | 4.14x | 7.31x | 10.70x | 8.91x | 2.91x |
(Data Source: Seeking Alpha )
RILY is expensively valued compared to its competitors. It has a balance sheet consisting of $216.1 million of cash and equivalents, and $4,601 million of debt. The company is heavily indebted, but high growth prospects of the company’s capital markets and wealth management businesses is responsible for its expensive valuation. In the last five years, the company’s revenue has grown at a CAGR of 24.82%, although it has grown from a small base. In the next five years, I expect the company’s revenue will grow at a CAGR of high single-digits. These are the reasons for the company's expensive valuation. The investment banking business outlook is robust since corporate earnings remain strong in recent years. In addition, U.S. companies are still sitting on piles of cash, which I expect would be readily deployed in the next round of M&A. Further, global wealth management environment will continue to remain strong in the next five years, leading to generation of steady cash for wealth management companies, particularly players with strong expertise in this area, like RILY. These factors should boost RILY’s revenue growth to a higher trajectory compared to its peers, and its share price will rise.
Assuming RILY’s revenue will grow at a CAGR of around 9% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $911.90 million, and at a CAGR of 9% the company’s mid-2027 revenue will be $1,403.00 million, or $49.59 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 0.65x and 1.95x. I expect in the next five years, the company’s price to sales multiple should touch a high of around 2.00x driven by growing demand for its services. Applying a price to sales multiple of 2.00x on RILY’s mid-2027 revenue per share, I get $99.18 as the company’s mid-2027 share price.
Risks
RILY’s investment banking clients generally retain the company on a short-term, engagement-by-engagement basis, rather than on a recurring basis for the long term. The company is engaged in connection with merger and acquisition transactions, corporate finance and many strategic advisory services. Since these engagements are singular in nature, the company seeks continuous engagements in regular intervals to remain profitable, and financially fit. Otherwise, the company’s revenue growth and results of operations could be negatively impacted.
RILY can grow its business through new product and service offerings, and through strategic investments, acquisitions and joint ventures. The company’s financial results of the future could be negatively impacted if it cannot properly manage its growth opportunities. Additionally, if the company gets engaged in any acquisitions or joint ventures, it could have to issue new shares. This could have dilutive impact on the company's shareholders.
Conclusion
RILY’s capital markets business is expected to grow significantly in the next five years driven by strong capital market activities worldwide which could start anytime in the next couple of years, once the inflationary pressure and tight monetary policy regime is over. The company’s wealth management business will also expand meaningfully in the same timeframe. The company’s shares have significant upside left for the long term, and long-term investors can buy the company’s shares around the current price to maximize return.
For further details see:
B. Riley Financial: Capital Market Activities Drive Long-Term Revenue Growth