LPL IPO Faces Opportunities, Headwinds
Despite LPL's secular growth opportunities, we're skeptical of the asset-management services firm's profitability.
LPL Investment Holdings, one of the country's largest providers of technology, brokerage, and other services to financial advisors, plans to raise approximately $450 million in an IPO next week. The firm focuses on independent, easy-to-use, and open technology and services to representatives serving the "mass affluent" market, individuals with $100,000 to $1 million in investable assets.
We think the firm faces a secular growth opportunity, given the long-standing trend of individual investors to hold and direct more and more of their retirement savings and related net worth. Further, the elevated volatility and weak returns realized in the US equity market over the last decade as well as the somewhat puzzling and weak current economic environment may provide incremental incentive for independent investors to seek outside counsel for their investing decisions for some time.
LPL has leveraged these positives over the last 20 years to amass a leading market position and a business generating roughly $3 billion of annual revenue. The firm's ability to navigate successfully the tough equity investing climate of the last decade should provide investors with confidence in the firm's operational practices. And yet, despite these many notable positives, we note several headwinds faced by LPL and its IPO investors.
Perhaps most noteworthy, LPL delivers comparatively low operating margins. Despite the rich growth prospects of in the independent investment services market, LPL faces brutal competition from foes like Waddell and Reed (WDR), SEI Investments (SEIC), and SS&C Technologies (SSNC). All of these firms produce notably higher operating margins than LPL, delivering operating profitability in the range of roughly 20%-35% compared to LPL's low- to mid-single digit margins. These operating results hint that LPL ma y not be able to deliver economic profits for its public shareholders.
LPL also sports a current debt to equity ratio of 1.5, reflecting an elevated debt load that may be a remnant of its historical focus on growth through acquisition. The comparable firms mentioned above exhibit much more manageable debt to equity ratios in the range of 0.30 to 0.60. This indebtedness reduces LPL's margin for error in a still uncertain macro environment. We also point out the potential for an overhang on the publicly traded shares after their debut, stemming from future potential stock sales by the firm's private equity sponsors who will own more than 30% of the stock outstanding post-IPO.
These reasons give us enough pause to rate LPL's IPO low interest.
This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at firstname.lastname@example.org or +1 312 384-4052.
Bill Buhr does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.