Key Takeaways
- LPL Financial shares fell 13% today after the company said it now expects to keep about 83% of Commonwealth Financial Network’s assets, down from about 90% in July.
- The Commonwealth deal got smaller, but the sell-off treats it as a failure, and that looks overdone.
- Adjusted EPS rose 15% to a record $5.97, while recruited assets fell 26% to $24 billion as rivals offer advisors bigger signing packages.
- The real test is the mid-November conversion, when the 83% estimate either holds or doesn’t.
LPL Financial (LPLA) stock is down 13% today, even though the company reported record adjusted earnings after Tuesday’s close.
The problem is Commonwealth Financial Network, the $2.7 billion acquisition LPL moves onto its platform in mid-November. LPL now expects to keep about 83% of Commonwealth’s assets, down from the roughly 90% it was still guiding to in July.
What exactly happened
In the third quarter:
- Adjusted EPS rose 15% from a year ago to a record $5.97.
- Organic net new assets were $29 billion, a 5% annualized growth rate.
- Expected run-rate EBITDA from Commonwealth fell to $415 million, from $435 million in July.
- Recruited assets fell 26% from a year ago to $24 billion.
CFO Matt Audette said on LPL’s third-quarter call that some Commonwealth advisors who had signed on to stay later changed their minds. He added that better synergies made up part of the lost EBITDA.
Wells Fargo cut its price target to $350 from $362 before the open and kept its Overweight rating. It said lower Commonwealth retention and near-term organic growth will likely weigh on the shares. JPMorgan, Barclays, TD Cowen and Truist cut their targets too, but even the lowest, Truist’s $335, is still well above today’s price.
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The deal shrank…but it still adds plenty
Fewer assets coming over means less revenue, and that’s what the stock is pricing. But LPL expects $415 million a year from Commonwealth by the end of 2027, and that would still add about 12% to its current adjusted EBITDA run rate.
And analysts expect normalized EPS to jump 27% in 2027, to $29.93, as Commonwealth comes in…
A $20 million cut to Commonwealth’s EBITDA is small next to that kind of growth, so today’s news shouldn’t move those estimates much.
The bigger worry is recruiting. CEO Rich Steinmeier said on the call that rivals are offering advisors bigger transition packages. If that keeps up, LPL either pays more to win advisors or wins fewer of them.
Priced for a lot worse
LPL traded at 11x forward earnings at Tuesday’s close, well below its five-year average of 15x…
After today’s drop, it’s closer to 10x, near its five-year low of 9.9x.
My take: the Commonwealth deal got smaller, and the stock is now priced as though the deal fell apart. That looks overdone.
Of course, the real test comes in mid-November. If more advisors leave at conversion, or recruiting stays this weak into the fourth-quarter report, that low multiple will start to look deserved.
So what is LPL Financial stock actually worth?
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
