The financial services sector is known for its exposure to credit cycles and economic downturns, which affect almost all areas of the sector. One conservative stalwart in this industry is Raymond James Financial Inc (RJF, Financial), a diversified financial services company with four key segments.
Overview of Raymond James
The Private Client Group segment provides investment services, portfolio management services, insurance products, mutual funds, distribution and accounting services, administrative services, margin loans, securities borrowing and lending services and custodial, trade execution and research services.
The Capital Markets segment provides investment banking services, including equity underwriting, debt underwriting, merger and acquisition advisory services, fixed income and equity brokerage services.
The Asset Management segment offers investment management, portfolio management and related administrative services to retail and institutional clients.
The Raymond James Bank is a traditional bank that provides insured deposit accounts, commercial, industrial, commercial real estate, residential mortgage and securities-based loans.
Founded in 1962, the St. Petersburg, Florida-based company currently has a market capitalization of $21.3 billion.
Company Position and Statistics
The company believes it is positioned uniquely between the big Wall Street wirehouses and small boutique investment banks. It has the scope and scale of the big Wall Street banks, but the high-touch customer service and client focus of the small boutiques.
Clients assets under administration are approximately $1.2 trillion and the company employs roughly 8,700 advisors. The company has historically been profitable and has logged 141 consecutive quarters without reporting a loss. It has also achieved high credit ratings, which are all investment-grade and consist of A- (Fitch), A3 (Moody’s) and A- (S&P).
Recent financial results
On July 26, the company reported fiscal third-quarter results for the period ended June 30. Net revenue increased 7% to $2.91 billion compared to the prior-year period. The benefit of higher short-term interest rates on net interest income and fees from third-party banks more than offset declines in investment banking and brokerage revenues and asset management fees.
Revenue increased 1% on a sequential basis, primarily due to higher investment management fees. Net income increased 23% over the prior-year period, driven primarily by higher net interest income and fees from third-party banks. Sequentially, net income available to common shareholders decreased 13%.
Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters of approximately $65 million and bank loan provision for credit losses of $54 million.
The company continues to generate high returns with annualized return on common equity of 17.9% and annualized adjusted return on tangible common equity of 22.7% for the first nine months of fiscal 2023.
The company had $8.4 billion in unrestricted cash on the balance sheet at quarter end and $3.1 billion in total borrowings. Shareholders equity was $9.9 billion and total assets were $77.6 billion.
Chairman and CEO Paul Reilly said, “Through the strength of our businesses and perseverance of our advisors and associates, we generated record net revenues and record net income to common shareholders during the first nine months of the fiscal year, up 5% and 22%, respectively, over fiscal 2022 despite challenging macroeconomic conditions. Importantly, our strong capital ratios and flexible balance sheet keep us well-positioned as we look forward.”
Valuation and future prospects
Book value per share at quarter end was $47.40, which put the stock trading at approximately 2.1 times book value. Most peers such The Goldman Sachs Group Inc. (GS, Financial) and Jefferies Financial Group Inc. (JEF, Financial) are trading in the 1 to 1.5 times book value range.
The consensus analyst earnings per share estimate for the fiscal year ending September 2023 is $8.50 and $9.78 for the following fiscal year. That puts the stock selling at 12 times current year earnings.
There are six Wall Street analysts that cover the company with an average price target of $121.17. The high target is $132 and the low target is $110.
The company pays an annualized dividend of $1.68, which equates to a current dividend yield of 1.65%. The payout ratio is only 20%, which may portend future dividend increases.
The GuruFocus discounted cash flow calculator creates a value of approximately $130 when using $8.50 as the earnings per share starting point and an 8% 10-year growth rate. However, DCF calculations for investment firms and banks are not a good indicator of valuation due to the inherent lumpiness and cyclicality of the business.
Recent guru trades
Gurus who have purchased Raymond James Financial stock recently include First Eagle Investment (Trades, Portfolio) and Jefferies. Investors who have sold out of or reduced their positions include Ken Fisher (Trades, Portfolio) and Glenn Greenberg (Trades, Portfolio).
Conclusion
Raymond James appears to be fairly valued, but it is an attractive opportunity in the diversified financial services sector because of exposure to investment management, investment banking and financial advisory services. However, the company still has major exposure to economic and credit cycles. A major stock market downturn could have a material negative impact on most of the company’s businesses.
