Goldman Cuts LPL Financial To Sell, Warns Q1 Could Miss Expectations

Shares of LPL Financial Holdings Inc LPLA have significantly underperformed year to date. However, the stock is currently 50 percent above the lows seen following the 4Q15 earnings report, trading at a 3x multiple premium to its peers.

Goldman Sachs’ Conor Fitzgerald downgraded the rating on the company from Neutral to Sell, while raising the price target from $19 to $21.

Unwarranted Premium

Fitzgerald believes that a premium valuation is unwarranted, given the company’s slower revenue growth, lack of buyback capacity till there is improved visibility into earnings, and increased execution risks on the implementation of the DOL’s fiduciary rule.

Revenue Growth

Fitzgerald explained the revenue growth was expected to be slower, “as variable annuity sales and overall commissions would be under pressure regardless of the outcome of the US Department of Labor’s forthcoming fiduciary rule.”

Variable annuity accounts for 40 percent of LPL Financial’s commission revenue. However, given the current interest rate environment, Fitzgerald expects these sales to be challenged, which in turn would suppress activity levels.

Debt Covenant
“The risk of LPLA tripping a debt covenant is lower now that rate expectations and markets have rebounded,” the analyst stated.

However, Fitzgerald expects LPL Financial to remain conservative in the near term and preserve cash, which would limit buyback activity.

DOL Rule

The analyst also pointed out that the company had higher execution risk associated with the Department of Labor’s fiduciary rule than most of its peers due to LPL Financial’s “exposure to variable annuity sales and commission-based accounts.”