Category: Research

The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. The iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years.

Although the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, still BlackRock will generate 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins during 2021-25.

Solid Organic Growth From Both its Active and Passive Platforms Continue to Lift BlackRock’s AUM

With $9.464 trillion in total assets under management, or AUM, at the end of September 2021, BlackRock is the largest asset manager in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations.

Financial Strength 

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2021 with $7.3 billion in long-term debt, The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of June 2021.BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends.The firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt-on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $300 million per quarter on share repurchases but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent close to $1.8 billion on share repurchases during 2020.BlackRock increased its quarterly dividend 14% to $4.13 per share early in 2021. We expect the dividend to increase at a mid- to high-single-digit rate the next five years, leaving the payout ratio (based on our forward earnings estimates) at around 45% on average annually.

Bulls Say 

• BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021 and clients in more than 100 countries. 
• Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
• BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile

BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 29% in fixed income, 8% in multi-asset class, 7% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

FactSet is best known for its research solutions, which include its core desktop offering geared toward buy-side asset managers and sell-side investment bankers. Research makes up about 41% of the firm’s annual subscription value, or ASV, but is FactSet’s slowest growing segment due to its maturity and pressures on asset managers. 

FactSet’s fastest-growing segments are its data feed business, known as content and technology solutions, or CTS (13% of ASV), and its wealth management offerings (11% of ASV). Rather than through an interface, users of CTS access data through feeds or application programming interfaces, or APIs. FactSet’s adjusted operating margins have been range bound (31%-36%) over the last 10 years as it continues to invest in new content and occasionally brings in new acquisitions at lower margins.

Financial Strength

FactSet has no net debt ($682 million in cash compared with $575 million in debt). FactSet’s balance sheet is arguably under-leveraged, and the firm has capacity for larger acquisitions. Before COVID-19, FactSet has not been shy about share repurchases and returning cash to shareholders. FactSet’s revenue is almost all recurring in nature and as a result it’s weathered the uncertainties of COVID-19 fairly well. FactSet’s client retention is typically over 90% as a percent of clients and 95% as a percent of ASV. FactSet also has low client concentration (largest client is less than 3% of revenue and the top 10 clients are less than 15%). In addition, compared with the financial crisis, FactSet has diversified its ASV from research desktops to analytics software, wealth management solutions, and data feeds.

Bull Say’s

• FactSet has done a good job of growing organic annual subscription value, or ASV, and incrementally gaining market share.
• FactSet’s data feeds business, known as content technology solutions, or CTS, and wealth management business represent a strong growth opportunity for the firm.
• There’s been a flurry of large deals in the financial technology industry and FactSet’s recurring revenue would make it an attractive acquisition candidate.

Company Profile 

FactSet provides financial data and portfolio analytics to the global investment community. The company aggregates data from third-party data suppliers, news sources, exchanges, brokerages, and contributors into its workstations. In addition, it provides essential portfolio analytics that companies use to monitor portfolios and address reporting requirements. Buy-side clients account for 84% of FactSet’s annual subscription value. In 2015, the company acquired Portware, a provider of trade execution software and in 2017 the company acquired BISAM, a risk management and performance measurement provider.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. 

Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating that require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Aptiv Lowers 2021 Guidance on Chip Shortage and Lingering COVID-19 Effect; Maintaining $105 FVE 11 Oct 2021 

On Oct. 11, Aptiv reduced 2021 guidance. Due to the microchip shortage and lingering effects of COVID-19, the company sees second-half 2021 global light-vehicle production at 38 million units, down 14% from its prior guidance that had assumed 44 million units

Management’s reduced 2021 guidance includes revenue in a range of $15.1 billion-$15.5 billion, down 6% at the midpoint from $16.1 billion-$16.4 billion prior guidance. The adjusted EBIT margin guidance range was lowered to 7.6%-8.4%, contracting 205 basis points at the midpoint from the 9.9%-10.2% prior guidance range. 

Aptiv could reach its previous revenue target given the firm’s substantial backlog but had anticipated sporadic customer production resulting in our margin assumption at the low end of Aptiv’s prior guidance. 

We maintain our $105 fair value estimate on the shares of Aptiv after reviewing management’s reduced 2021 guidance.

Company Profile

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

ADP faces fierce competitive pressure from nimble upstarts, legacy peers, accounting software and ERP providers. We expect new solutions will allow ADP to compete more aggressively on functionality, reduce software maintenance costs and provide scope for greater operating leverage, supporting margin uplift. However, we anticipate increasing competitive pressure will result in greater pricing pressure and force ADP to sustain high levels of investment to ensure the functionality of its product offering remains competitive. This investment is in addition to the continued investment in sales and implementation required to roll out new solutions and migrate clients. As such, we expect ADP’s price increases will be limited to about 0.5% a year, in line with recent growth but below long-term averages, limiting margin expansion to about two percentage points over the next five years.

We expect increased regulatory complexity, tight labor markets and growing adoption of hybrid work will underpin strong demand for ADP’s solutions supporting greater share of wallet and modest market share gains in the small and midsize market. This includes greater penetration of the outsourced payroll and HR model. However, we expect forced platform migrations to hamper ADP’s enterprise market share over the next decade before gradually recovering as the new platform is adopted in the market. In aggregate, we expect ADP’s overall market share to remain broadly flat for the five years to fiscal 2026 before gradual growth as platform migrations complete.

Financial Strength

ADP is in a strong financial position. At the end of fiscal 2021, ADP’s balance sheet was modestly geared with net debt/EBITDA of 0.1. During fiscal 2021, ADP almost tripled long-term debt to USD 3 billion to fund share repurchases and optimise its capital structure with low cost debt. We expect ADP’s annual operating income can comfortably cover annual interest expense on its debt at least 60 times over our forecast period. ADP also has access to short term funding facilities to meet client’s obligations rather than liquidating available for sale securities. ADP has returned over USD 18 billion of capital to shareholders during the eight years to fiscal 2021 through dividends and share repurchases. We expect ADP’s strong free cash flow generation will support a dividend payout ratio of about 60% over our forecast period. The balance sheet is robust, and ADP has ample scope to increase leverage to execute on bolt on acquisitions. 

Bulls Say 

• ADP benefits from high client switching costs, a scale based cost advantage, intangible brand assets and a powerful referral network.
• Despite facing fierce competitive pressures and undergoing forced platform migrations, ADP has retained high revenue retention and improved operating margins over the past decade.
• ADP has a strong track record of returning capital to shareholders through dividends and share repurchases.

Company Profile

Automatic Data Processing, or ADP, is a provider of payroll and human capital management, or HCM, solutions servicing the full scope of businesses from micro to global enterprises. ADP was established in 1949 and serves over 920,000 clients primarily in the United States. ADP’s employer services segment offers payroll, HCM solutions, HR outsourcing, insurance and retirement services. The smaller but faster-growing PEO segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Advisors on LPL’s platform serve approximately 4% of wealth management assets in the United States. Through its ClientWorks portal, the company offers a one-stop solution for advisors that incorporates billing, account analytics, research, trading, and relationship-management tools. LPL aims to offer services to all advisors regardless of business model.

Production retention, which measures the percentage of advisor-generated revenue maintained from the previous year, has recently been over 95%. Recently, LPL has been making moves to improve its value proposition to advisors, with the rollout of a new online portal and the purchase, and subsequent integration, of Advisory World. Acquisitions of advisor networks have also been a source of growth, with the 2017 acquisition of NPH for $325 million and the wealth management business of Waddell & Reed in 2021 for $300 million showing that LPL is willing and able to buy growth outright when it makes sense to do so. 

Financial Strength

LPL’s financial strength is adequate. At the end of 2020, the company had $2.3 billion of long-term debt. With a debt/equity ratio of about 1.8 times, the company is fairly leveraged. The company also has about $1.9 billion of goodwill and intangibles on its balance sheet, so has no tangible equity. The bulk of its debt, about $1.4 billion, will come due in 2024, with the rest due the following year. With a debt/adjusted EBITDA ratio of around 2.5 times, LPL should have sufficient cash to meet these financial obligations.LPL has paid a consistent $0.25 quarterly dividend since first-quarter 2015. 

Our fair value estimate correlates to a price/forward earnings multiple of 22 times and an enterprise value/EBITDA multiple of 12.5 times. Positive adjustments to our fair value estimate include $6.50 from earnings since our previous valuation update, $20.50 from recent growth in client assets and higher projected growth in client assets, $10.50 from increasing the growth rate and assumed returns on capital after year 10 in our model, and $3.50 of miscellaneous adjustments.

Bulls Say’s

• LPL has been able to weather the storm of a changing industry, and expanding margins suggest that its business model remains intact.
• The company has been moving toward more recurring revenue, such as advisory fees and revenue from client cash balances, which the market may reward.
• LPL has the resources to recruit aggressively, and improvements in feedback receptiveness should help it maintain strong retention rates.

Company Profile 

LPL Financial Holdings is an independent broker/dealer that provides a platform of proprietary technology, brokerage, and investment advisory services to financial advisors and institutions. The company also provides financial advisors licensed with insurance companies customized clearing services, advisory platforms, and technology solutions. LPL provides a range of services through its subsidiaries. Private Trust supplies trust administration, investment management oversight, and custodial services for estates and families; Independent Advisers Group offers investment advisory solutions to insurance companies; and LPL Insurance Associates operates as a brokerage general agency that offers life, long-term care, and disability insurance sales and services.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.