2023-04-09 03:44:31 ET
Summary
- Stifel Financial Corp. offers retail wealth management services for institutions as well as services as an investment banking firm.
- In my view, Stifel is now well prepared to accelerate the number of loans given at the current credit terms.
- Considering that interest rates increased significantly as compared to that in 2021, I believe that the loans given will likely be more profitable.
- Hiring new financial advisors with existing relationships with clients will likely drive revenue growth and economies of scale.
Stifel Financial Corp. ( SF ) does not only show significant know-how accumulated in the finance industry, management also reports significant cash accumulated. In my view, the current balance sheet could serve for hiring a substantial number of financial advisors to offer more loans now that interest rates are rising. I am also optimistic about potential M&A transactions and introduction of new products related to the research platform offered by Stifel. Even considering risks from new regulations, lack of hiring, or market volatility, in my view, the stock could trade at a higher rate.
Stifel Corp Offers A Significant Amount Of Products, And Has Accumulated A Lot Of Know-How
With more than 100 years of history and operating primarily through its subsidiary Stifel, Nicolaus & Company, Stifel Financial Corp. offers retail wealth management services for institutions as well as services as an investment banking firm.
The main activities of the company can be summarized in the following factors: private clients, to whom it offers secure transactions and financial planning services, institutional equity and municipal research, trading and finance, investment banking services, including mergers and acquisitions, public offerings and private positions, and retail and commercial banking.
Stifel has grown exponentially in recent years through the acquisition of some key assets in the market, such as Vining Park in 2021, allowing Stifel to expand its area operations and delve into regional markets. It is also relevant the acquisition of AXIT Capital Partners in 2022, which operated in Europe and the Middle East. Finally, in 2022, the company acquired Torreya Partners, a financial services company mainly related to the development market and technology in the life sciences. I believe that the fact that Stifel knows well how to acquire other targets and integrate new teams will likely be appreciated by market participants.
The distribution of the business model is given in two main segments of operations: global wealth management and institutional group. To these two segments is added the "others" segment for the resolution of minor matters, corporate conflicts, and others.
Through its agents, the company provides financial security and related services to clients in the United States, Europe, and Canada. Among these clients we find individuals, institutions, and private organizations. None of these clients represents a significant portion of the company's activity despite the fact that they are mainly concentrated in the United States. In the last decade, there has been an increase in activities in Europe, specifically in the United Kingdom.
The wealth management segment consists mainly of financial security, broker-dealer, and advisory services for banking investments. Clients include individuals and institutional, municipal, or private groups, to whom the company provides the possibility to choose between payment models with traditional structures or rates by objectives throughout the development of activities.
The institutional segment is made up of research activities, and public financing. These services have to do mainly with advice and recommendations regarding the management of institutional assets as well as the investment of capital in the banking market in addition to the transaction services in which Stifel offers itself as a guarantor.
Assets Increased More In 2022 Than The Total Amount Of Liabilities
Stifel reports modest but sufficient inventory, a balance sheet that gives it great liquidity, and a fee-based revenue model along with a large distribution network that positions it as a competitive company within the local and international markets.
In 2022, Stifel Corp reported an increase in the amount of cash, the total amount of assets, and loans held for investment. At the same time, the total amount of liabilities increased, but at a lower rate than the total amount of assets.
In my view, Stifel is now well prepared to accelerate the number of loans given at the current credit terms. Considering that interest rates increased significantly as compared to that in 2021, I believe that the loans given will likely be more profitable. It would explain why cash on hand increased significantly. Perhaps, management prepared a significant amount of cash to offer at beneficial credit conditions from 2022 and 2023.
In my view, Stifel will do good by laying more emphasis on its communications about the current state of the balance sheet. The book value per share is currently close to $44 per share, which is close to the stock price. In my view, with the interest rates at its highest mark in many years, the stock price could be valued a bit more.
Stifel Corp reports cash and cash equivalents of $2.199 billion, cash segregated for regulatory purposes of $29 million, receivables from brokerage clients of close to $924 million, and receivables from brokers, dealers, and clearing organizations of around $418 million.
Management also noted securities purchased under agreements to resell worth close to $348 million, with financial instruments owned, at fair value of close to $731 million, available-for-sale securities, at fair value of $1.636 billion, and held-to-maturity securities of $5.990 billion.
Loans included held for investment loans of $20.465 billion, and investments, at fair value of $99 million. Besides, with operating lease right-of-use assets of $775 million, goodwill of $1.326 billion, and intangible assets of $130 million, total assets stood at $37.196 billion.
Liabilities
The list of liabilities included brokerage clients of $770 million, brokers, dealers, and clearing organizations of close to $94 million, drafts of $102 million, securities sold under agreements to repurchase of $212 million, and bank deposits of $27.117 billion.
Besides, with financial instruments sold at close to $454 million, accrued compensation of $677 million, accounts payable and accrued expenses worth close to $1.264 billion, and senior notes of $1.114 billion, total liabilities were equal to $31.867 billion.
My Assumptions Include Further Hiring Of Financial Advisors, New Products And New Services In New Regions, And Further M&A Operations
Considering the track record reported by Stifel, I believe that management will likely know how to expand its domestic private client footprint. Hiring new financial advisors with existing relationships with clients will likely drive revenue growth and economies of scale. I believe that the balance sheet is strong, and will help support hiring new personnel.
More in particular, I am quite optimistic about the references made by management about the potential addition of new professionals and services related to the research platform offered by Stifel. Management gave the following commentary in this regard.
Our goal is to further monetize our research platform by adding additional institutional sales and trading teams and by placing a greater emphasis on client management. Source: Annual Report
I also believe that new financial investment services at an industrial level as well as in products and new geographic regions could bring business growth. I also assumed in my financial model that considering the expertise of Stifel in the M&A markets, new acquisitions will most likely take place. I also believe that with the interest rates at their maximum level for years, other banks will most likely finance any acquisition proposed by Stifel.
We believe the current environment and market dislocation will continue to provide us with the ability to thoughtfully consider acquisitions on an opportunistic basis. Source: Annual Report
Opportunistic acquisitions over the past 15 years have accelerated the growth of our investment banking business through expanded industry, product, and geographic coverage, including capital-raising for start-up companies, particularly from the venture community. Source: Annual Report
My DCF Model Implied A Valuation Of $86-$87 Per Share
My assumptions about the future of Stifel Corp included net income growth, stable D&A, amortization of loans growth, growth from provision of credit losses, and loans originated as held for sale growth. The results would also include CFO growth and FCF growth.
My numbers for 2033 would be 2033 net income of $703 million, 2033 depreciation and amortization of $47 million, and amortization of loans worth $121 million with amortization of premium on investment portfolio of close to $14 million.
My numbers also included 2033 provision for credit losses of $116 million, deferred income taxes of $212 million, stock-based compensation of close to $125 million, changes in receivables from brokerage clients of $206 million, and changes in receivables of brokers, dealers, and clearing organizations of $820 million.
I also assumed changes in securities purchased under agreements to resell of $1461 million, 2033 financial instruments owned adjustments of close to $2.4 billion, and loans originated as held for sale of $13.236 billion. Finally, the CFO would stand at $1.526 billion. With capex of -$48 million, 2033 free cash flow would be $1.479 million.
If we assume an exit ratio of EV/CFO of 5x, the residual FCF would be $7.632 billion. Besides, with a WACC of 9.6%, the enterprise value would be close to $8.665 billion. With cash and cash equivalents of $2.199 billion, senior notes of -$1115 million, debentures to Stifel Financial capital trusts of -$60 million, financial instruments sold, but not yet purchased, at fair value close to -$455 million, and an equity value of close to $9.236 billion, the fair price would be $86-$87 per share.
Competitors
Competition for Stifel comes from similar banking security firms, some of which have a broader offering of brokerage services and greater access to developments and resources. To this we must add the growing competition from other financial institutions, such as banking firms or online platforms. Stifel considers that most of its competitive capacity comes from attracting and retaining professionals, highly experienced brokers, investors and trading professionals, and portfolio managers. For this reason, management develops employment programs with great benefits, offering job security to its employees.
Risks From Market Volatility, Brand Erosion, And Failed Human Resources Practices
In my view, Stifel is highly exposed to market risks, such as lack of liquidity, changes in interest rates, and credit risks. In this sense, the risk of international markets and changes in the global economy in general also mean a situation of exposure for the company. If investors decide to hold cash, purchase no securities and funds, or do not consult financial advisors, I believe that future FCF will not trend north.
At the operational level, Stifel depends directly on the skills of its professionals as well as fee income from managing its clients' assets. Thus, there is a potential risk in terms of the retention of key employees. I believe that the competition in the market is highly conditioned on the recognition of brands and the quality of the services that each firm provides. If clients perceive that their assets are not successfully managed, they may leave Stifel.
Finally, the company is exposed to regulations by governments. Besides, future legislation in the area of ?stocks, funds, or even ?cryptocurrencies will undoubtedly change the way of operating at a financial level and the ways of carrying out transactions.
Takeaway
Currently with a significant amount of cash on hand, Stifel will likely be able to hire new financial advisors with existing relationships with clients, which may lead to loan generation. I also believe that the current environment of rising interest rates may benefit the equity research, trading activities, and consulting business model. I did identify risks from market volatility, lack of successful human resources practices, or changing regulations, however I believe that the stock price could be higher.
For further details see:
Stifel Financial: Prepared To Hire And Sign M&A Deals, And Cheap