Viorika
Elevator Pitch
I rate Raymond James Financial, Inc.’s (NYSE:RJF) stock as a Hold.
In my previous January 11, 2022 update for Raymond James Financial, I upgraded the stock’s investment rating from a Hold to a Buy on the basis that RJF should be a beneficiary of higher interest rates. Although Raymond James Financial’s share price declined by -6% since my early-January article, RJF has outperformed the broader market during this period, as the S&P 500 was down by -20% in the same time frame.
However, I have decided to lower my rating for Raymond James Financial to a Hold again, as I don’t think that RJF’s stock price outperformance can be sustained. I have reviewed Raymond James Financial’s recent operating data release and assessed its valuations, prior to deciding on a Hold rating for RJF.
RJF’s August 2022 Operational Data Announcement In The Limelight
A few days ago, on September 27, 2022, Raymond James Financial issued a 8-K filing which revealed a number of key operating metrics relating to the company in August 2022.
Prior to assessing RJF’s key metrics in subsequent sections of this article, it is relevant to highlight certain parts of the management commentary that was included as part of the recent 8-K filing.
In its 8-K filing released on September 27, Raymond James Financial acknowledged that “client assets declined primarily due to the lower equity markets,” but it stressed that “advisor retention and recruiting remain strong.”
With respect to its Capital Markets business, RJF disclosed that “investment banking revenues improved” MoM (Month-on-Month) without providing actual numbers, and emphasized that “the M&A (Mergers & Acquisitions) pipeline remains healthy.” However, Raymond James Financial warned that “the timing of closings (of deals) is largely dependent on market conditions.”
Private Client Group Business Segment’s Assets Continue To Shrink
RJF’s Private Client Group assets under administration amounted to $1,107.5 billion as of the end of August 2022 as revealed in its September 27, 2022 8-K filing. This is equivalent to a -3% YoY decline and a -2% MoM contraction. Similarly, the Private Client Group business segment’s assets in fee-based accounts decreased by -3% on both a MoM and a YoY basis to $626.9 billion as of August 31, 2022.
This represents a continuation of the trends seen when Raymond James Financial reported its financial results for the third quarter of fiscal 2022 (YE September 30) earlier on July 27, 2022. As highlighted in its Q3 FY 2022 earnings presentation slides, both the Private Client Group’s assets under administration and assets in fee-based accounts shrunk by -11% QoQ in the most recent quarter.
RJF noted at the company’s Q3 FY 2022 results briefing that “a 16% sequential decline in the S&P 500 index negatively impacted client asset levels” for Q3 FY 2022.” The S&P 500 closed at 3,719.04 as of September 28, 2022, and a recent September 26, 2022 CNBC article cited comments from a Morgan Stanley (MS) strategist predicting that “the S&P 500 could fall to the low 3,000s.” Analysts from Goldman Sachs (GS) are slightly more optimistic, as they expect the S&P 500 to end the year at 3,600.
In any case, there seems to be further downside for the S&P 500, which has a positive correlation with Raymond James Financial’s client assets for the Private Client Group. As such, it is reasonable to assume that the Private Client Group’s assets, revenue and earnings will continue to be on a downwards trend in the very near term.
Banking And Capital Markets Businesses Are Expected To Be Under Pressure
Loans for Raymond James Financial’s Banking business increased by a modest +1% MoM from $42.3 billion as of July 31, 2022 to $42.8 billion as of the end of August this year as indicated in the company’s recent late-September 8-K filing. In contrast, RJF’s Banking business, excluding the impact of acquisitions, saw its loans grow by a much higher +8% QoQ in Q3 FY 2022.
The Banking business’ net interest margin expanded by +40 basis points QoQ from 2.01% in Q2 FY 2022 to 2.41% for Q3 FY 2022. Higher net interest margins in a rising rate environment will be positive for RJF’s Banking business, but this is likely to be offset by slower loan growth in a weak economy.
Separately, RJF’s commentary on M&A deals in its recent 8-K filing is consistent with industry data.
A September 6, 2022 S&P Global Market Intelligence research report mentioned that the aggregate value of M&A transactions for the US market jumped from $45.6 billion in July 2022 to $81.3 billion in August this year. Nevertheless, S&P Global Market Intelligence retained its cautious view of M&A transactions in the short term, highlighting in its report that “higher interest rates” and the fact that “blank-check companies have faced increased scrutiny” have resulted in fewer private equity and SPAC (Special-Purpose Acquisition Company) deals, respectively.
Profit before tax for Raymond James Financial’s Capital Markets business segment fell by -47% YoY and -30% QoQ in the third quarter of fiscal 2022, and I don’t see the outlook for RJF’s Capital Markets segment improving in a meaningful way anytime soon.
Valuations
Raymond James Financial is now valued by the market at 11.2 times consensus forward next twelve months’ normalized P/E as per S&P Capital IQ’s valuation data.
RJF’s five-year and 10-year mean forward P/E multiples were higher at 12.9 times and 13.7 times, respectively. This suggests that Raymond James Financial’s current valuations are at a discount as compared to historical averages.
Closing Thoughts
RJF is now a Hold instead of a Buy. The outlook for Raymond James Financial has deteriorated substantially since my earlier article. While valuations for RJF aren’t exactly expensive, I think that it will take time for economic conditions to improve, before the market is willingly to re-rate the company’s shares. In that respect, I am of the view that a Hold rating for Raymond James Financial is fair.
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