Broadridge Rides On Solid Business Model, Lower Tax Rates

Shares of Broadridge Financial Solutions, Inc. (NYSE:BR) have gained 16.5% in the past year, outperforming the 13.2% rise of the industry it belongs to.

The company recently reported mixed first-quarter fiscal 2019 results, with earnings beating the Zacks Consensus Estimate and revenues missing the same.

Adjusted earnings of 79 cents per share outpaced the consensus mark by 9 cents and surged 46% on a year-over-year basis on the back of consistent organic growth, higher event-driven revenues and a lower tax rate. Total revenues of $973 million lagged the consensus estimate by $2 million but increased 5% year over year. Recurring fee revenues of $575 million rose 5% from the year-ago quarter’s level driven by organic growth and recent acquisitions.

Broadridge has an impressive earnings surprise history, having surpassed estimates in three of the trailing four quarters, the average being 18.7%. The Zacks Consensus Estimate for current-year EPS has been revised 10.1% downward in the past 30 days.

What’s Driving Broadridge?

The company's business model helps it generate a significant percentage from recurring fee revenues, which include contributions from net new business, internal growth and acquisition-related synergies. Broadridge’s diverse products and services coupled with strategic acquisitions have been boosting its top-line growth. Higher revenues are expected to drive margins and increase profits in the long run.

Broadridge Financial Solutions, Inc. Revenue (TTM)

The company has supplemented internal growth with strategic acquisitions. So far in 2018, Broadridge acquired FundAssist Limited, MackayWilliams LLP and ActivePath. It made three acquisitions in 2017 and six in 2016. We believe that such buyouts are helping Broadridge to expand product portfolio and customer reach, besides enabling it to evolve as a leading financial and outsourcing services provider.

While tax benefit will continue to support earnings growth, trends like growing demand for data and analytics, mutualization and digitization are expected to drive sales. Broadridge has ramped up investments in digital, AI, cloud and blockchain particularly through acquisitions. These investments are likely to enhance the value of the company’s core product offerings and will prove beneficial in the long run. Globally, consistent demand for technology solutions should help the company gain significantly from its SaaS-based offerings.

Risks

Incremental investments may offset the positive impact of higher event-driven revenues. Broadridge's frequent acquisitions could result in additional leverage on the balance sheet. The company completed acquisitions of FundAssist Limited, MackayWilliams LLP and ActivePath at aggregate prices of $47 million, $8 million and $25 million, respectively.

Customer/Client concentration is a major risk for Broadridge. During fiscal 2018, 2017 and 2016, Broadridge generated approximately 21%, 20% and 25% of total revenues, respectively from its top five customers. The largest single client accounted for approximately 6%, 6% and 7% of total revenues in fiscal 2018, 2017 and 2016, respectively.

These clients work with numerous segments. Therefore, the loss of a single client due to merger or consolidation, financial difficulties or bankruptcy, or the termination or non-renewal of contracts affects the operating performance. So, the company is always under pressure to improve and maintain client or customer relations.

Zacks Rank & Stocks to Consider

Currently, Broadridge is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the broader Business Services sector include The Interpublic Group of Companies, Inc (NYSE:IPG) , Paychex, Inc (NASDAQ:PAYX) and WEX Inc (NYSE:WEX) , each carrying a Zacks Rank #2 (Buy). The long-term expected EPS (three to five years) growth rate for Interpublic, Paychex and WEX is 7.4%, 8.5% and 15%, respectively.

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