In early 2007, payroll processor Automatic Data Processing (NYSE: ADP) spun out Broadridge Financial Solutions (NYSE: BR). A weak stock market over the past couple of years has left shares of Broadridge little changed from levels when they first became public. At current levels, the market is not giving Broadridge the credit it deserves for its stable business model and subsequent downside protection. Better yet, recent events could indicate upside potential for shareholders.
IN PICTURES: Digging Out Of Debt In 8 Steps

Third Quarter Sales And Profit Trends

Total sales advanced 6% to $490.8 million as new sales offset "weak market conditions (that) impacted trade volumes and stock record growth". Revenue in the flagship investor communications solutions segment, which consists primarily of processing and distributing proxy materials, grew 6.5% and accounted for 72.6% of total sales. Quarterly strength was cited in mutual fund proxy services while bolt-on acquisitions also boosted the top line.

Securities process solutions, which help financial institutions maintain securities transactions records, saw a slight downtick to account for the rest of sales. Broadridge lost a number of clients in this segment and also experienced lower fixed income trade volumes. The firm currently runs a third division, securities clearing, but now considers it a discontinued operation as it will be sold to Penson Worldwide (Nasdaq: PNSN) by the end of its fiscal year. The transaction allows Broadridge the opportunity to jettison a division that wasn't profitable and focus better on its core business.

The Penson deal and a number of other one-time items affected the comparability of year-over-year profit trends. As reported, Broadridge experienced a 39.1% drop in net income to $24.9 million, or 18 cents per diluted share.


Broadridge management plans to "achieve higher levels of growth and earnings when market-driven volumes return". It also cited strong sales to new clients, which included the return of brokerage firm Morgan Stanley Smith Barney that was created when Morgan Stanley (NYSE: MS) acquired a majority stake from Citigroup (NYSE: C) at the height of the financial crisis. For the first three quarters of its fiscal year, Broadridge stated that closed sales increased 41%.

Broadridge is currently calling for full-year sales growth between 7% and 9% and earnings from continuing operations between $1.58 and $1.64 per diluted share. Analysts currently expect full-year sales to increase 6.3% to $2.3 billion and earnings per share of $1.59, which would be about flat from last year's bottom-line levels. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Bottom Line

The sale of the underperforming securities clearing unit should boost top-line growth and profitability going forward to provide some level of upside potential. The downside is already well protected given Broadridge's customer retention levels (98% so far this year), recurring revenues (80% of sales) and profitability (double-digit net margins). It also boasts a market leadership position in delivering proxy materials and similar securities processes.

Management targets mid-single-digit sales growth and expects to leverage this into higher earnings and cash flow growth over time. At a forward P/E of just over 14, the shares offer a compelling risk/reward tradeoff.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center