LPL Financial Vs. Raymond James: A Financials Pair Trade

LPL Financial Holdings Inc LPLA performed significantly better than Raymond James Financial, Inc. RJF over the last six months as it gained around 31 percent, while Raymond James Financial traded around 18.5 percent higher.

The Analyst

Credit Suisse's Craig Siegenthaler on Friday initiated coverage for LPL Financial with an Outperform rating and a $68 price target. He has also initiated coverage for Raymond James Financial, with Underperform rating and with an $86 price target.

The Thesis

The analyst forecasts upside for LPL Financial's discounted relative valuation and also for 2019 EPS estimates. He expects an increase in profitability due to disciplined expense control, positive impact of the NPH acquisition, an improving return on client assets-adjusted organic growth rate and from NT asset sensitivity. Siegenthaler sees LPL Financial's guidance as the most conservative among the peers.

Raymond James Financial's business is going to see continued secular headwinds and also headwinds from newer regulatory initiatives, said the analyst. Siegenthaler sees the company's NIM as already elevated and he added that its deposit beta is highest among the peers. He expects its asset mix to shift toward lower-yielding securities and he also expects the loan spreads to tighten further.

The analyst sees no M&A ahead for the company as it integrates its Scout & Reams acquisition and he forecasts a higher share count in 2018.

The Price Action

LPL Financial's is trading about 30 percent below Credit Suisse's price target, while Raymond James Financial is trading about 2 percent above Credit Suisse's price target.