Broadridge Stock: Adding To The Watchlist, But Not Buying Yet (NYSE:BR)

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According to Peter Lynch, “boring” companies can make some of the best investments, because there isn’t a lot of excitement driving up the shares to a point where returns are less likely to be attractive, and fewer competitors are looking to enter the space. Luckily for Broadridge Financial Solutions (NYSE:BR), sending shareholder communications and doing back-office work for investors isn’t the most exciting of sectors. That said, its financial performance has been quite remarkable, more than making up for being a little bit of a boring company.

So what exactly does Broadridge do? It has two main areas. One is Investor Communication Solutions which manages critical shareholder communications, such as proxy services. It manages more than two billion critical shareholder communications per year for mutual funds and equity shareholders. The other main area is called Global Technology and Operations, which provides technology that facilitates trading processing and wealth management functions. It helps power $9 trillion per day in fixed income and equity trades. Global Technology and Operations is further sub-divided in two areas, Capital Markets and Wealth & Investment Management. Capital Markets is a global leader in post-trade processing for cash securities, and is doing interesting things like launching an AI-powered fixed income trading platform. Wealth & Investment management is a leading provider of back-office capabilities and is growing an integrated investment management suite.

Broadridge Overview

Broadridge Investor Presentation

Financials

While nothing spectacular, Broadridge’s profit margins are quite solid, with an operating margin averaging ~13%, the company has no issue generating profits. There is some seasonality to its revenues and margins, given that shareholder communications tend to be more frequent during “Proxy Season” which goes from mid-April to mid-June.

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Growth

All three franchises are growing recurring revenue nicely for Broadridge, with the core function of investor communications growing a roughly 7% per year during the last four years, capital markets growing a bit faster at ~8%, and Wealth & Investment Management being the growth star with a four-year CAGR of ~13%. The three franchises combined generated ~$3.2 billion in recurring revenue in FY21. What is great is that this is very ‘sticky’ recurring revenue, and the company can concentrate its efforts to adding to this existing base.

Broadridge Business Segments

Broadridge Investor Presentation

Increasing recurring revenue has propelled earnings per share higher, both adjusted EPS and GAAP EPS have grown nicely, and are not too different from each other, which we normally see as a red flag when it happens.

Broadridge Growth

Broadridge Investor Presentation

Based on its FY2022 guidance, Broadridge is poised to deliver another strong year, including mid-teens recurring revenue growth, continued margin expansion, and 13- 15% Adjusted EPS growth.

Balance Sheet

One thing to be aware of with Broadridge is that it has been taking debt to finance acquisitions, and that its total long-term debt is considerably higher than its cash and short-term investments.

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Its debt/EBITDA ratio has been climbing, and currently stands at ~3.3x. We view this as still acceptable, but should the ratio continue climbing we would start to get worried about it. Fitch recently reaffirmed Broadridge’s credit rating at ‘BBB+’ with outlook stable.

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Stock-based compensation

We were happy to see that Broadridge appears to be very reasonable with its stock-based compensation. At less than 2% of revenue we view this as a very acceptable level, and wish more companies would behave responsibly in this respect like Broadridge.

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Broadridge Valuation

Over the last decade Broadridge’s valuation multiples have in general trended higher. Around 2014 the company was trading at the very cheap valuation multiple of ~10x EV/EBITDA, but as the company has delivered growth and strong financial results it has re-rated higher. We view the current valuation of ~19x EV/EBITDA as reasonable but far from being a bargain. We would prefer to buy, if the opportunity present itself, to buy the shares below the ten year EV/EBITDA average of ~15.6x.

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The price/earnings ratio is currently above the ten year average too, at ~32x vs. the ten year average of ~27x. Given the level of growth Broadridge is delivering we think a low 20’s p/e would be attractive.

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Broadridge pays a dividend and it is currently close to its ten year average of ~1.85%. Since it still has growth opportunities we think the company does well by not distributing all of its profits, and instead reinvesting a large percentage back into the business.

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Overall we currently see Broadridge as fairly valued, but would require some margin of safety to become interested in the shares. We would consider buying them if the share price goes down 15-20% from here for non-fundamental reasons.

Risks

The main risk we see with Broadridge is that it has been adding significant debt, weakening its balance sheet. This is also reflected in a deteriorating Altman Z-score, which is now below 3.0. We believe that Broadridge can manage this debt load, but hope they start deleveraging soon, and that they certainly stop increasing it.

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Data by YCharts

Conclusion

Broadridge is an attractive financial company that has delivered strong returns for investors, and which we view as fairly valued at the moment. Should there be a dip in the share price for non-fundamental reasons, we would become interested in the shares. While the company can appear boring to investors, there is nothing boring in the returns it has delivered, and the growth it is still generating. This is a quality company that should be on investors’ radars.

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