Broadridge Financial Solutions Inc (NYSE: BR)
Last Price: US$149.97| Fair Value: US$185.00
Business Strategy & Outlook:
Broadridge has been the dominant proxy and interim service provider for broker/dealers for more than 20 years. Broadridge’s regulated proxy and interim business is its crown jewel, and a disproportionate amount of the firm’s net income comes from its fiscal third and fourth quarter during proxy season. In addition, Broadridge generates about 30% of its fee revenue and profit from its global technology and operations or GTO segment, which provides securities processing solutions. Amid COVID-19, Broadridge has benefited from higher engagement of retail investors through higher position growth and elevated trading volumes. Since its spinoff from ADP in 2007, Broadridge has streamlined its operations and expanded into adjacent markets. After years of losses in its clearing business, Broadridge sold it in 2010 to Penson Worldwide. Operationally, Broadridge entered into an IT-services agreement with IBM in 2010 to increase efficiency. Expanding on its mailing, data security, and processing capabilities, Broadridge has completed numerous acquisitions. Since 2010, Broadridge has completed at least 25 acquisitions. Notable acquisitions include DST’s North American customer communications business for $410 million in 2016 and RPM Technologies for $300 million in 2019. The NACC business provides print and digital communication solutions, content management, postal optimization, and fulfillment to a variety of sectors, including financial-services firms, utilities, and healthcare firms. RPM Technologies provides enterprise wealth management software solutions and services. In May 2021, Broadridge acquired Itiviti, a provider of order and execution management trading software and order routing networking and connectivity solutions, for $2.5 billion. It is believed that the acquisition complements its existing GTO segment and while not cheap, should be accretive given low interest rates. During its December 2020 investor day, Broadridge laid out its three-year per year goals including recurring revenue growth of 7%-9% (organic: 5%-7%), adjusted operating margin expansion of 50 basis points, and adjusted EPS growth of 8%-12%. Thus far, Broadridge has largely achieved these goals.
Risk and Uncertainty:
The biggest risk to near-term revenue and profits is equity proxy position and mutual fund interim growth. During the financial crisis, the number of equity proxy positions was down only 2% (for year ending June 30, 2009). Given the recurring nature of the equity proxy and mutual fund interims business, It is believed Broadridge’s business is relatively recession-proof. Given the regulated nature of proxy and interim communications, the fees that Broadridge can charge issuers on behalf of its broker/dealer clients is overseen by the NYSE Working Proxy Group. The last fee reviews went into effect on Jan. 1, 2014, with a very modest impact on Broadridge. Though Broadridge has historically fared well in fee reviews, it could be negatively affected in a future review. Broadridge has modest client concentration. On a firm wide basis, the largest client accounts for 6% of revenue. Within the global technology and operations segment, the firm’s largest 15 clients account for 51% of segment revenue. Broadridge generally works with its largest clients across multiple segments. From a geographic perspective, Broadridge generates about 88% of its revenue in the United States. From an environmental, social, and governance perspective, a lot of risk is not observed arising from Broadridge’s business model. Broadridge’s software and solutions service millions of users, and as a result the firm must maintain strong product governance and data security
Bulls Say:
Company Description:
Broadridge, which was spun off from ADP in 2007, is a leading provider of investor communications and technology-driven solutions to banks, broker/dealers, asset managers, wealth managers, and corporate issuers. Broadridge is composed of two segments: investor communication solutions and global technology and operations.
(Source: Morningstar)
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