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About LPL Financial Holdings

Many of you have likely never heard of LPL Financial Holdings, and prior to peering through George Soros’ and his investment fund’s recent 13F filing, we candidly hadn’t either.

I guess we are all just learning together at the end of the day, aren’t we?

In keeping with that spirit, based in San Diego, California, LPL Financial can be categorized as a broker of sorts, specifically tailoring its product offerings and services to financial advisors all across the United States (somewhere in the neighborhood of 21,000, by the way), particularly in that they assist said advisors from anywhere regarding general regulatory compliance matters, operational oversight, trading in markets and instruments such as stocks, bonds, options (among others), offering a platform that enables advisors to efficiently execute trades on their clients’ behalf’s, among a few other services.

Just like the advisors LPL Financial Holdings serves on a regular basis, LPL itself collects fees for the aforementioned products and services, for instance, with the company generating a commission based off of the trades it executes on behalf of its advisor clients, also generating revenues through a subscription-based model through offering access to its technology platforms, offerings and other increasingly useful, practical tools that better streamline and enhance the ultimate client’s experience with their respective advisor that, of course, just so happens to be contracting with LPL Financial Holdings in getting all of this done.

Now, with all of this being said, for the most part, we have our fair share of hesitancies in blindly assuming and labeling LPL as being a recession resistant company, however, upon further review in considering the fact that the company produces a sizable amount of its revenues through the commissions it earns for executing trades, and, when the economy turns for the worst, sure, advisors might be hewing down their portfolios, but, one of the beauties of operating as a broker in this context is that even in this setting, advisors will trade and subsequently transact and subsequently fees are earned by a firm such as LPL.

We view this as a sort of general hedge or cushion to the company’s revenue(s), as it allows LPL Financial to make money both during the good and bad times, which is precisely when portfolio managers trade.

That was sort of a joke and if it fell flat, please receive our sincerest apologies.

If you did happen to enjoy that joke, we are just happy to know that you aren’t a trader (get it, instead of traitor?)

Ok, whatever, we’re done now.

All things considered, LPL Financial is a broker-dealer and a registered investment advisor (RIA) as well, offering an array of financial products to a corresponding array of different clients and individual customers.

With all of this in the melting pot, let’s dive headfirst into this company’s core financial figures, ratios and other relevant metrics so as to determine whether or not this company’s stock (NASDAQ: LPLA) is worth indefinitely holding as a staple in your treasured investment portfolio.

LPL’s stock financials

Currently maintaining a market capitalization of $17.22 billion, accompanied by a share price of $227.71 as well as a price-to-earnings (P/E) ratio of 15.45 along with an annually issued dividend of $1.20 distributed to its shareholder base, LPL Financial Holdings is in good standing so far, at least from where we stand, as the company’s price-to-earnings ratio implies that its shares are trading at a discount with respect to what they are actually worth, referencing the commonly held ideology that a P/E ratio of 20 is said to indicate that a company’s stock is trading at exactly fair value, and anything less hints at it being undervalued, and, you guessed it, anything higher than 20 implying that it is overvalued relative to its intrinsic worth.

Of course, a dividend hardly ever hurts as well, and with a large platform and the business model(s) it runs, we assume with a great degree of confidence that this company can afford to continue paying and even perhaps raising its dividend over time.

Nevertheless, you don’t read these articles for our assumptions alone, so let’s learn more about this company’s financials and gain a better general idea as to just how cash flow generative and profitable this broker-dealer, RIA really is.

But first, we shall look at the overall condition of the company’s balance sheet, with LPL’s executive team at the helm of approximately $9.4 billion in terms of total assets as well as around $7.3 billion in terms of total liabilities, which, for a platform and firm as large as this one with all of its moving parts, we view this as an overall healthy balance sheet, as it is comfortably total asset-heavy and also seemingly implies that the company has and is currently financing and making investments to further differentiate itself from the competition, not to mention that a considerable portion LPL’s total liabilities are categorized as “total long term debt,” allowing the company an inherent time cushion to pay down and ultimately, back, its outstanding debts.

In moving right over to the company’s income statement, it can be found that LPL’s total annual revenues since 2018 have been moving in the right (and upwards) direction, spanning from a relative low of just about $5.2 billion (as reported in 2018), leading all the way up to its latest reported figure (yes, increasing revenues on a year-over-year basis) of just north of $8.6 billion (2022), which could be due to a variety of things, perhaps through raising some of its commissions and other fees due to inflation (as pretty much every single other business has in recent years) and/or perhaps through continuing to expand its array of advisory and brokerage services, or perhaps simply through acquiring more clients and integrating them into its already existing product lines and service offerings.

This certainly speaks well to the company’s ability to maintain and, heck, even grow revenues on a year-over-year (YOY) basis, even during times of great economic uncertainty and distress.

With respect to the company’s cash flow statement, both LPL’s net income and total cash from operations have been positive and consistent, all things considered, with, for instance, the company’s net income spanning between (again, also referencing between 2018 and 2022) $439 million, as reported in 2018, to a recent high of $846 million, as reported in 2022.

This also indicates that LPL doesn’t have the hardest time when it comes to turning over a profit through its business operations.

Let’s gain some further clarification on this matter and also find just how competitive LPL is when it sizes up against the industry’s listed average(s) (on TD Ameritrade’s platform).

LPL’s stock fundamentals

According to TD Ameritrade’s platform, LPL Financial Holdings’ trailing twelve month (TTM) net profit margin is pegged at a swell 11.99% to the industry’s respective average of 20.93%.

Ok, well, maybe not so swell in comparison to the industry’s average.

While we would usually be willing to cut this firm some slack on this front given that its operations are just so diversified and scaled (thus, the cost of these rather expansive operations eating into the company’s TTM net profit margin at a higher rate than a smaller, more regional broker-dealer and advisor platform), in our eyes, this discrepancy is far too wide for a leader such as this one within the financial advisory industry.

Perhaps there are some things that we don’t know, however, the numbers speak for themselves and suffice it to say we are not the largest of fans when it comes to these particular figures as they pertain to LPL Financial, as this company clearly needs to do some work in better streamlining its operations and perhaps ultimately work on cutting out some expenses.

This isn’t the worst of outcomes, again, given the general regionality of financial advisory and domestic broker-dealer services within the United States, but it assuredly isn’t the best either.

Regarding the company’s TTM returns on both assets and investments, respectively, LPL’s figures on these fronts are much rosier, with, for example, the company’s TTM return on investment listed at 19.14% to the industry’s average of 8.54%, thankfully indicating that LPL Financial Holdings has historically been good at putting its available capital to work in fruitful, value accretive projects.

Should you buy LPL Financial stock?

Let’s keep this short, sweet and to the point.

LPL Financial is candidly much more recession resistant than we had initially assumed, specifically as it grew its total annual revenues at an impressive rate over the last few years, it has remained resoundingly cash flow and net income positive, it has a fine balance sheet, its core TTM return metrics are in great condition, however, if there’s any blemish to be found it is this company’s comparable TTM net profit margin.

However, as stated previously, many of LPL’s competitors are likely regional players, thus not nearly as large and scaled as it is, making it naturally easier for said smaller firms to generate higher TTM net profit margins, primarily given their smaller operational footprint and lower amount of expenses.

Still, we would like to see this company’s TTM net profit margin creep up within the next handful of years, so as to ensure that the company isn’t falling asleep at the wheel and it is serious about cutting some of its non-essential expenses and inching closer and closer to the cumulative average of the competition.

Putting all of this data and information together, we deem it most appropriate to offer LPL Financial Holdings’ stock (NASDAQ: LPLA) a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.