BR: Gauge Analysis (updated February 28, 2021)

I have analyzed Broadridge Financial Solutions's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

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.

Broadridge recorded profits of $519 million, $4.40 per share, on revenue of $5 billion during the last 12 months.  In the quarter that ended on December 31, 2020, Broadridge earned $0.48 per share on a GAAP basis, and it gained $0.73 per share after non-GAAP adjustments and exclusions.  See Broadridge's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Broadridge now trade for about $142 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.

Analysis Results:

Broadridge's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $16.8 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 570% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 0% (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 20% (very good)

    Owner Earnings growth rate (five-year average) = 20% (very good)

    Free Cash Flow growth rate (trailing year) = 22% (very good)

    Free Cash Flow growth rate (five-year average) = 11% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 22% (good)

    Operating Profit/Sales = 14.6% (good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 17% (very good)

    Dividend = 46% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 22.7 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 41.3 (expensive)

    Free Cash Flow/Market Value = 3.4% (low, less than the five-year average of 4.0%)

    Acquirer's Multiple = 26.6 (very expensive)

    Price/Book Value = 11.7 (more expensive than the five-year average of 10.4)

    Price/Sales = 3.6 (more expensive than the five-year average of 2.9)

In summary, the analysis assigned Broadridge Financial Solutions five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 46 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Broadridge does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 38.2 percent, from $142.49 to $88.06, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Broadridge's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on Broadridge's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #broadridge    #br    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis 

BR: Earnings Report for the Quarter Ending December 31, 2020

Broadridge Financial Solutions reported before the market opened on February 2, 2021, it earned $0.48 per diluted share in the quarter that ended on December 31, 2020, up 433 percent from earnings of $0.09 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, rose 38 percent to $0.73 per share from $0.53 one year earlier, a less robust change than the GAAP percentage. The exclusions responsible for the $0.25 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Amortization of Acquired Intangibles and Purchased Intellectual Property [$0.28 per share], Real Estate Realignment and Covid-19 Related Expenses [$0.05 per share], and Tax impacts [($0.08) per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Broadridge to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Broadridge's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  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.

The following table is a simplified version of Broadridge's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the December 2020 quarter totaled $1.1 billion, 9 percent more than last year.  The Investor Communications business was responsible for 74 percent of overall revenue, and this unit's revenue grew by 9.5 percent compared to the year-earlier result.  The Global Technology and Operations business contributed 29 percent of revenue, and this unit's revenue increased by 7.6 percent.

I was expecting Broadridge to report revenue of $1.0 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $34.9 million (3.4 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $807 million in the latest quarter, which translates into a Gross Margin of 23.5 percent of revenue. Since it was higher than the 19.4 percent Gross Margin achieved in the year-earlier quarter, it signifies that Broadridge sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 25.1 percent in the December 2020 quarter, and Broadridge missed that prediction by 1.6 percent.

Sales, General, and Administrative expenses totaled $169 million in the December 2020 quarter, up 4.9 percent from one year ago.  SG&A expenses decreased from 16.6 percent to 16.0 percent of quarterly revenue, which shows Broadridge spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 15.3 percent of revenue, and the actual percentage turned out to be higher than the prediction.

Broadridge's Operating Income was $80 million in the quarter, up 196.6 percent from the year-earlier period.  Operating Income fell short of my $100 million estimate by $20 million.

Interest and other non-operating items summed to a net expense of $10 million.  My estimate for non-operating items was $14 million.

The effective income tax rate rose by 15.1 percent to 18.9 percent, which had a negative effect on net income.  I expected the tax rate to be 20.9 percent.

Net income attributable to Broadridge was $56 million, $0.48 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $10 million, $0.09/share. My earnings estimate for  the latest quarter was $68 million ($0.58/share), so Broadridge Financial Solutions earned $0.10 per share less than I had expected.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Interest + Income tax rate 

      – Worse than expected:  Gross Margin + SG&A 

      – Near expectations:  Revenue growth + SG&A/Revenue + Misc non-operating items 

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 #QtrlyRpt   #nac_financialanalysis

BR: Look Ahead to December 2020 Quarterly Results

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.

Broadridge recorded profits of $473 million on revenue of $5 billion during the last year. In the quarter that ended on September 30, 2020, Broadridge earned $2.15 per share (excluding certain items), which significantly beat the $0.63 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $1.4 billion, 12 percent more than last year's $1.2 billion. The Investor Communications business was responsible for 55 percent of overall revenue, and this unit's revenue grew by 7.2 percent compared to the year-earlier result. The Global Technology and Operations business contributed 22 percent of revenue, and this unit's revenue increased by 8.1 percent.

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