2023-11-16 08:53:37 ET
Summary
- Broadridge provides solutions and services for the financial sector with the majority of revenues being on a recurring basis.
- The company has historically grown partly through acquisitions, but Broadridge has also achieved a good amount of organic growth with an excellent Q1 performance.
- The current price seems steep with the company trading at a high P/E and a slight overvaluation with my DCF model estimates.
Broadridge Financial Solutions (BR) provides solutions and services for the financial sector. The company has highly valuable recurring revenues providing investors with stable cash flows. Broadridge has historically grown its revenues through acquisitions, but the company seems to have refocused around performing well organically, which the company seems to have done well. The impressive financials have been priced into Broadridge’s stock price, though, as the price seems quite steep.
The Company & Stock
Broadridge provides solutions in the financial technology sector. The company has both recurring and non-recurring revenues, of which the recurring revenues represent around 61% of Broadridge’s total revenues. The recurring revenues consist of solutions in capital markets, regulatory frameworks, customer communications, wealth & investment management, data-driven fund solutions, and issuers in order of size. The non-recurring revenues revolve around distribution and event-driven revenues – Broadridge has a wide range of solutions in the financial industry. The recurring revenues are very valuable in my opinion; Broadridge has had a very stable financial performance as a result of the very non-cyclical part of Broadridge’s operations.
The company’s offering has been formed partly due to acquisitions – from FY2014 to FY2021, Broadridge has had constant cash acquisitions . Since, Broadridge’s acquisitions have slowed down into a halt, showing Broadridge’s organic performance in a better way.
The stock has performed extremely well – from 2007, the stock has returned 817% with an additional dividend yield on top. Currently, the dividend yield stands at 1.81%. The share price appreciation adds up to a CAGR of approximately 14.3%:
Financials
Broadridge has achieved a good amount of growth. From FY2004 to trailing figures, the company’s achieved revenue CAGR is 7.6%:
As Broadridge hasn’t had significant cash acquisitions from FY2021 forward, the company’s organic performance has come into a better light in the most recent years. The revenue performance has been great despite the lack of acquisitions – most recently in Q1 of FY2024, Broadridge achieved a revenue growth of 11.5% . Broadridge has a strong position in the financial services industry, providing the company with a good amount of organic growth opportunities.
Broadridge has also achieved a stable EBIT margin. From FY2004 to FY2023, the company’s average EBIT margin has been 15.2%. Currently, Broadridge has a trailing EBIT margin of 16.1%, very slightly above the long-term average:
Valuation
Broadridge trades at a forward P/E multiple of 22.9 at the time of writing, around 18% above the stock’s long-term average of 19.4, seemingly pricing a good amount of growth from Broadridge:
To further analyse the valuation of the stock, I constructed a discounted cash flow model in my usual manner. In the model, I estimate Broadridge’s good financial performance to continue in a stable manner – for FY2024, I estimate a revenue growth of 8%, in line with the first quarter’s recurring revenue growth. After the year, I estimate the growth to slow down in steps into a perpetual growth rate of 3%. Altogether, the revenues estimates represent an organic CAGR of 5.1% from FY2023 to FY2033.
Broadridge has achieved stable EBIT margins throughout the company’s history. I believe that the company could achieve very slight margin expansion through increasing recurring revenues, adding organic operating leverage. For FY2024, I estimate a margin of 15.9%, slightly below the current trailing level. After FY2024, I estimate some leverage into an eventual EBIT margin of 16.5%, achieved from FY2030 forward. The company also has a very good cash flow conversion from GAAP figures – the company has a large amount of amortization in accounting earnings from previous acquisitions, that don’t affect cash flows.
In total, the mentioned estimates along with a weighted average cost of capital of 8.21% craft the following DCF model with a fair value estimate of $159.79, around 10% below the stock price at the time of writing. The stock seems to be valued very tightly, but the company could still prove itself a worthy investment with further acquisitions or a greater-than-expected organic earnings growth.
The used weighted average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
In Q1/FY2024, Broadridge had $36.4 million in interest expenses. With Broadridge’s current interest-bearing debt balance, the company’s interest rate comes up to a figure of 3.95%. The company leverages debt quite moderately, and although the company has been drawing more long-term debt, I estimate a level near the current one with a long-term debt-to-equity ratio of 15%.
On the cost of equity side, I use the United States’ 10-year bond yield of 4.62% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Broadridge’s beta at a figure of 0.97 . I believe that the estimate is too high, though – Broadridge has the majority of its revenues coming from recurring sources, and the company has proven to provide stable cash flows even in a turbulent economy – the company’s operating earnings grew by 1.8% in 2008 and only decreased by -6.0% in 2009, showcasing good stability during the great financial crisis in addition to the currently strong performance in a challenging macroeconomic environment. I believe that a lower figure for the beta is appropriate – with a lack of a better estimate, I utilize a figure that’s 75% of Yahoo Finance’s estimate for the beta, 0.73; unlike my usual method, I believe that Yahoo Finance’s estimated beta for the stock is inaccurate, and a lower estimate is constituted due to Broadridge’s stable performance. Finally, I add a small liquidity premium of 0.2%, crafting a cost of equity of 9.13% and a WACC of 8.21%, used in the DCF model.
Takeaway
Broadridge has had an exceptionally good financial performance. The company has stable recurring revenues and cash flows, making the investment very safe in my opinion. In the capital asset pricing model, I adjust the beta into a more fair representation of Broadridge’s operations, contrary to my usual method – otherwise, the DCF model would seem like a misrepresentation. Still, the DCF model seems to point towards a slightly overvalued stock. The estimated overvaluation falls into a fair margin of safety, and Broadridge’s good qualitative components in my opinion partly make up for the valuation – for the time being, I have a hold rating for the stock.
For further details see:
Broadridge: Magnificent Financials Come At A Price