2023-06-14 10:33:14 ET
Summary
- Broadridge Financial Solutions is a FinTech SaaS selling into public market investment entities. The firm's value prop centers around trading/financial data and the trade lifecycle, both essential for trading firms.
- The company has demonstrated ongoing growth and steady margins. It also maintains a natural moat due to the high costs of entering and staying in the financial data services business.
- While growth has become choppy in recent quarters, I think the company's business model, as well as its position within its sector, should allow for continuing growth over many years.
- This should see performance that makes Broadridge increase earnings while also maintaining a growth premium in its shares, making it a good buy-and-hold investment.
Overview
Broadridge Financial Solutions ( BR ) ‘Broadridge’ is a fairly low profile FinTech. For those that have worked in the investment industry, however, it is a well-known brand. Broadridge’s business is centered around data provision and processing for capital markets firms, with most of it tailored to entities that work with publicly-traded instruments (securities). The firm has branched into providing services for private market investment as well.
Since Broadridge’s product portfolio is quite broad I took the time to distill it into its significant product areas. We can see that Broadridge provides a holistic set of services for capital markets companies.
Business Function |
Portfolio Analytics & Reporting, Performance Attribution, Fee Management |
Compliance, Disclosures, Regulatory Communications |
Asset and Debt Servicing, Custody, Cash & Collateral Management |
Shareholder Proxy Services |
Connectivity, Market Data |
Credit, Market, Operational, and Intraday Risk |
Data Management |
Equities, Fixed Income, and FX Trade Processing |
SWIFT Services |
Investment Accounting, Global Tax Services |
Securities Financing |
Post-Trade Services, Reference Data |
Pricing and Valuation |
Broadridge certainly provides a broad array of products. Across its product portfolio I would say there are two core threads that undergird its revenue generation: data and trade processing. It is generating profit from both of these areas by selling software on a subscription basis. In several cases, such as trade processing and securities financing, there is also a floating variable fee of some sort. Ahead I will briefly distill the company's value proposition in light of these two themes.
Data:
Connectivity and market data let trading entities connect to exchanges so that they can trade. This is something that every institutional investor working in public markets ultimately needs to pay for. Broadridge is not an exchange but handles the technology that actually lets companies connect to an exchange for its customers. For interested readers, I covered the economics of the trading exchange business in a previous article .
Reference data is historical market data that customers use to develop and test trading strategies.
Portfolio data is also a central product area. This is technology that lets investors see their portfolio holdings as well as measure and attribute its performance. It also creates the necessary data layer for regulatory reporting.
Trade Processing & Post Trade:
This is another important area and refers to technology that's actually used to manage the trade lifecycle. In an institutional context, this is a multi-step process involving several different types of entities. Every financial instrument that gets traded goes through a trade lifecycle with several steps. I'll briefly outline it here.
The pre-trade part of the trade lifecycle sees a trade order be sent to one or more liquidity venues. These can be exchanges but also other liquidity venues such as dark pools.
Next, the trade enters the execution stage. It executes across each liquidity venue according to the rules sent in along with it for executing that particular trade. This does not necessarily occur immediately, and trades can sit in one or more venues for indeterminate periods of time before they actually execute. A good example of when this would occur is a limit order put in at a price that's quite removed from the market price of the instrument being traded. It will only execute when the price lines up, which is at some unknown part of the future. Having trades like this in place for various contingencies is an important part of risk management and alpha generation for active investors.
Next up is clearing and settlement. Clearing involves transferring and confirming securities data to make sure the trade is sound. This involves the confirmation of funds in an account of a clearing broker, which is almost always the prime broker for a fund. Settlement is when the actually money moves.
Post-trade occurs within the firm and involves updating data to reflect the trade in the company's portfolio.
Data and trading form the backbone of everything that active investment vehicles do, and Broadridge covers that whole range.
With that said we can take a look at how BR stock has been performing to date. Year to date it beat the S&P but is trailing the NASDAQ Composite. I’ll note that it has outperformed the S&P500 Index on price return alone (14.67%) while generating a 15.28% total return (shown in chart).
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We can contextualize Broadridge’s stock price further by looking at its performance since it first entered the public markets, which it did as a result of a Q1 2007 spin-off from ADP. This stock has definitely been a good one, posting a 683% price return and an excellent 988% total return since.
Price Return
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Total Return
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We can see that Broadridge is not trading at all-time highs right now. More specifically it looks like it was sold off from its peak in late 2021 before ending up at where it is now. The recent trend looks to be favorable, although that is yet unclear. In this article I’ll review Broadridge’s financials and determine if its worth investing in at the moment.
Financials
Revenue growth has been choppy but robust overall over the past decade. The last two years indicate a healthy acceleration in revenue growth for the firm. The quarterly trendline is also a volatile one. While holding at a double digit growth rate for 6 quarters, Broadridge saw this decline rapidly in fiscal Q1 and Q2 (calendar Q3/Q4) of last year. Growth picked back up in fiscal Q3 this year, although did not reclaim its previous level or hit the double digits. Current guidance has revenue growth remaining in the high single digits through the end of this year.
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The company has also been profitable all throughout, also with an increasing trendline. I will note that net margins are not particularly high for a business that primarily sells technology, even falling into the single digits last year. This is due to the added layers of cost that come with working in the highly-regulated, complex, and often expensive securities business.
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On the bright side it appears that net margins have been maintained at their level overall, yearly variance aside.
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As to the balance sheet, Broadridge maintains positive and growing equity but has also accumulated increasing levels of debt over the last few years. This likely comes down to their expansion into more capital-intensive business lines such as securities financing, which requires extensive holdings of liquid securities in order to be viable. This is still not a large amount of debt for the firm’s size and the capital structure doesn’t give me pause.
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These financials demonstrate ongoing growth in what’s still a steady business. Broadridge can reliably generate the margins that it has had even when its top line growth rate fluctuates fairly significantly. Given how recent double-digit growth has occurred it also seems possible that it can happen again. Of course, this comes down to the level of growth in the securities industry.
Idiosyncratic Factors, Risk, and Valuation
The defining idiosyncratic factor for Broadridge is that it is one of only several large-scale financial data companies in the market today. In a business as expensive to enter and to stay in as financial data services, that is a significant advantage. Everything from startup costs to customer switching costs is materially higher for financial data and software; it isn’t like enterprise SaaS. This provides a natural moat to companies that operate in this ecosystem, something I previously outlined as it applies to the financial exchange business. All of this suggests that Broadridge is a lot less likely to go out of business in the long-term and a lot more likely to keep its margins throughout.
The risk here, then, takes the form of disruption in financial sector purchasing behavior. Widespread uncertainty was quite likely the driver underlying the firm’s two particularly weak quarters late last year. Just like companies in any other sector, capital markets entities go through cyclical periods. Broadridge’s revenues are then directly determined as a result. Any large-scale shock that disrupts the investment management sector in particular would damage Broadridge’s business materially.
Another, more distant, factor is also worth mentioning: fee compression. If active management falls out of vogue for good, there will be that much less money going into asset managers, hedge funds, and the like. This could shrink the pool of money available for Broadridge’s products even if the industry were to keep growing long-term. On the other hand this could further favor mature businesses such as that of Broadridge.
Broadridge also trades at a significant premium to the financial services sector overall. At its current trailing GAAP P/E of 32.96, it is roughly 350% of the sector median of 9.43. Its forward P/E of 28.64 is about 305% of the sector median of 9.39. This stock is definitely not cheap. This kind of lofty valuation also leaves a lot more room for the stock to drop if its prospects dry up.
Overall I believe that Broadridge's long-term share price will end up being determined a factor I would call its 'growth lifespan'. What I mean here is that Broadridge can continue growing at decent or good rates (8-15%) for a significantly above-average number of years due to the properties of its business, namely its moat. Over many years this compounding will continually grow earnings while also providing investors with a rationale to maintain a growth multiple in the company's shares. I believe that is the situation we have with its price currently. Over time the firm should then continually grow earnings while also maintaining its valuation multiple, leading to higher share prices.
Conclusion
Considering all of this together I think that BR stock is a good buy. While it can be considered expensive from a present valuation perspective, I think this is a company that's built to stand the test of time. The economics of its sector provide it with a moat and an increased likelihood of maintaining its market position, allowing for an extended growth lifespan that will compound earnings significantly. This should allow for the company and its stock to continue appreciating over the long-term and delivering returns for its shareholders.
For further details see:
Broadridge: A Good Long-Term Bet