Broadridge Processes over 6 billion investor and customer communications
This month’s stock pick is Broadridge Financial Solutions (NYSE: BR). Many of you may have never heard of this company before. But if you own stocks or mutual funds, I’m sure that you’ve received investor communications from ProxyVote, which is one of Broadridge’s services.
Broadridge makes about 80% of its revenues from its Investor Communication Solutions business. This business segment provides governance and communications solutions to the following financial services clients: banks/broker-dealers, asset management firms/mutual funds, corporate issuers and wealth management firms. In addition to financial services firms, their Customer Communications business also serves companies in the healthcare, insurance, consumer finance, telecommunications, utilities, and other service industries.
From 2011-2018, their revenue and earnings growth was impressive. Revenues started at $2.2 billion in 2011 and grew every year to reach $4.3 billion in 2018. During that time, the share price rose over 700%, from a 2011 low of 19.01 to a 2018 peak of $138.24.
In the fiscal year 2019, they:
- Processed approximately 80% of the outstanding shares in the U.S. in the performance of our proxy services
- Processed over 6 billion investor and customer communications through print and digital channels
- Processed on average over $7 trillion in equity and fixed income trades per day of U.S. and Canadian securities
- Provided fixed income trade processing services to 19 of the 24 primary dealers of fixed income securities in the U.S.
Last year, however, revenues merely grew 1% and the stock is currently 12.3% below its 2018 high. Based on 2019 diluted earnings per share, Broadridge’s P/E ratio is about 30. At the current price, the stock is certainly not a steal. But because of its monopoly-like market share in investor communications, I consider it a reasonable price in which to start a position.
Flashback ten years ago to 2009 and revenue growth was also weak, at -2.7%. As we all know, this period marked the Great Recession. My take on the recent weak revenue growth is that Broadridge is going through another 2009-like period. In hindsight, we know that they made it out of that period a huge winner. And I’m betting that history repeats itself.
Stats (As of 11/22/2019)
- Market Cap: $13.9B
- Closing Price: $121.20
- Trailing P/E: 31.0
- Forward P/E: 21.6
- Profit Margin: 10.6%
- Return on Equity (ttm): 38.8%
- Revenue (ttm): $4.3B
- Quarterly Revenue Growth (yoy): -2.5%
- Diluted EPS (ttm): $3.91
- Quarterly Earnings Growth (yoy): -27.1%
- Total Debt/Equity (mrq): 269.1%
- Free Cash Flow (2019): $566.4M
Broadridge is making a lot of acquisitions. These acquisitions are all related to their core business and look great on paper. But there’s always a risk that these purchases don’t go as planned.
As I mentioned above, revenue growth has slowed to a crawl. I suspect that this is a temporary situation that will turnaround in a few years. But if I’m wrong, this could be a new norm for the company, which would likely lead to a huge decline in the share price.
Should I Buy?
Broadridge Financial Solutions could be a good addition to a portfolio that needs exposure to:
- The Technology Sector
Be sure to do your own research and determine for yourself if Broadridge Financial Solutions is a good stock for your portfolio.
HOW MUCH SHOULD I BUY?
Here are some portfolio guidelines we Wolves try to live by:
- Thou shalt not hold more than 35% in any one particular sector
- Thou shalt not invest more than 10% of principal into 1 individual stock
- Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.
The Bottom Line
Broadridge Financial Solutions has a monopoly-like market share on investor communications. It’s going through a period of slow revenue growth. It went through a similar period in the Great Recession but eventually came out a huge winner. Shares seem a bit high with a P/E of 30 (base on 2019 earnings), but based on their great business, the current price seems reasonable.
So what do you think about Broadridge Financial Solutions? Share this story on social media and leave a comment in the comment box.
I/we own shares of stock in BR.
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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