With earnings season for wirehouses and broker-dealers starting this week, LPL Financial Holdings and Charles Schwab Corp. are the top picks among "retail brokers" by Steven Chubak, managing director of Wolfe Research.
"The retail brokers remain our favorite subsector within our rate sensitive coverage given better fundamentals," Wrote Chubak in a note over the weekend. He cited retail brokers' organic growth, resilient fee trends, less exposure to federal reserve quantitative tightening, limited credit exposure, as reasons for his sanguine outlook.
"In our view, the second half setup for the retail brokers is constructive, as share price performance, [net new assets] and cash growth is seasonally stronger in the back half of the year," Chubak wrote. LPL Financial Holdings, with the ticker LPLA, and Charles Schwab Corp., with the ticker SCHW, "remain our favorite names across the group" in comparison to large retail or "money center" banks and investment banks.
LPL Financial is the largest service provider for independent contractor reps, while Schwab is the biggest for registered investment advisors. Both have been growing through mergers, with LPL executing a series of acquisitions over the past few years, including Atria Wealth Solutions Inc., and Schwab's acquisition of TD Ameritrade, including its registered investment advisory custody business.
Other retail brokers included in Wolfe Research's analysis include Ameriprise Financial Inc., Raymond James Financial Inc. and Stifel Financial Corp.
At 1:00, shares of LPLA were up 1.5% and trading at $276.62, while shares of SCHW were up 2.2% at $74.87.
"In Schwab's case, the increase in interest rates is certainly positive," said one senior industry executive, who asked to speak confidentially. "Schwab makes ton of money on its cash, and more financial advisors means more cash."
"Regarding LPL, Dan Arnold took over as its CEO back in 2017 and has done an unbelievable job of managing that business," the executive said. "It's clear he was the guy to create growth there."
LPL Financial's recruiting of financial advisors has been the best so far this year, according to Wolfe Research, with 511 net financial advisor gains so far this year. In second place is Raymond James Financial Inc, with 69 net financial advisor gains, followed by Cambridge Investment Research Inc., with 35 so far in 2024.
"LPLA continues to deliver the strongest [earnings per share] growth across our coverage, has widened the recruitment/net new asset gap relative to peers, and screens quite attractively on valuation," Chubak wrote. "Despite pushback from investors on LPLA’s heavy reliance on cash sweep and {interest rate] spread revenue, LPLA screens far better than peers, reinforcing our view that LPLA has more durable sources of revenue, supporting a higher target multiple."
Meanwhile, Schwab has a number of factors in its favor for the remainder of the year and into next, Chubak noted. Those include: maturing securities being reinvested at much higher prevailing rates, and excess capital generation supporting "a meaningful ramp" in the company's buyback of shares, he wrote. "We also see additional levers SCHW can pull to accelerate the ramp in earnings and capital build," he added.
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