This "look-ahead" post discusses how I came up with an estimate for Broadridge Financial Services' earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available in February, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before getting into the details, let's take a step back and start with background information about Broadridge.
Broadridge provides investor communications, securities processing and other financial services. Broadridge performs proxy voting services for more than half of all public companies and mutual funds globally, and in an average day it processes $8 trillion in fixed income and equity trades. Broadridge was spun off from Automatic Data Processing in 2007. In 2019, Broadridge completed four acquisitions: Rockall, a provider of securities-based lending and collateral management solutions; RPM, a provider of enterprise wealth management software solutions and services; retirement plan custody and trust assets from TD Ameritrade; and, Shadow Financial Systems, which had cryptocurrency and Exchange Traded Derivatives capabilities. On December 31, 2019, Broadridge and IBM agreed that IBM will operate, manage and support the Broadridge Private Cloud for the next 10 years.
Shares of Broadridge now trade for about $149 each, giving the company a market value of $17 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Broadridge updated its guidance for fiscal year 2021, which ends next June, after the company last reported quarterly results. The update (see the excerpts below) indicate that the company now expects revenues and earnings to be higher than it did when the fiscal year began.
Unfortunately for my purposes, Broadridge didn't provide any specific written guidance for the December quarter. However, during a conference call, the company's management did voice the following statement shedding some light on expectations for the quarter.
We do expect second quarter earnings to be lower than in the first quarter and more in line with historical averages of 12% to 14% of our full year earnings. Embedded in that view are our expectations for event-driven revenues of approximately $40 million, a more normalized tax rate and the impact of the increased investment spend, I noted.
Broadridge expects its GAAP EPS in fiscal year 2021 to be 5 to 12 percent greater than the $3.95 per share it earned in fiscal year 2020. The prediction range is, therefore, $4.15 to $4.42 per share. As the company noted, about 13 percent of this annual EPS can be expected in the second quarter, so a reasonable EPS range for the quarter is $0.54 to $0.58.
To come up with a revenue estimate for the December quarter, I confirmed that Broadridge normally records ~22 percent of fiscal year revenue in the second quarter. If I assume revenue for the fiscal year will be 2.5 percent higher (the midpoint of the guidance range) than the previous year's $4.53 billion, the estimate for the latest quarter becomes: 0.22 * 1.025 * $4.53 billion = $1.02 billion.
The GAAP operating income margin in fiscal 2020 was about 13.8 percent. The company expects that to increase by 180 basis points, but margins in the December quarter are usually much lower than the yearly average. If I assume an operating margin of 10 percent in the quarter, it would imply that the cost of goods sold + sales, general, and administrative expense would equal $1.02 billion * (1- 0.1) = $920 million. In a typical quarter, the cost of goods sold is about 83 percent of operating expenses, or 0.83* $920 million = $764 million. Sales, general, and administrative expenses would be $920 million - $764 million = $156 million.
Non-operating expenses can be variable, but an interest expense of $15 million per quarter is fairly typical.
An income tax rate of 21 percent would yield net income of $67 million ($0.57 per share), which is consistent with the company's guidance.
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#broadridge #br #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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