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In a February 28 presentation to analysts attending the UBS Small-Mid Cap 1x1 Symposium, Bibliowicz emphasized a number of different elements in its changing business model. Most striking, was its growing emphasis on recurring revenue. Starting all the way back in 2004, it's been looking to build a balanced business model where repeat business is the norm. In 2007, recurring revenue was 45% of its overall business. By the end of 2011, it was up to 62% and climbing.
Most importantly, its Corporate Client Group, which is the most profitable of its three segments, is 100% recurring revenue. Its Advisor Services Group is the next best, with 63% recurring revenue, and dragging up the rear is the Individual Client Group, with 17.9% recurring revenue. It's not surprising then that the Corporate Client Group's adjusted EBITDA in 2011 was almost double that of the Individual Client Group. On the bright side, the Individual Client Group's adjusted EBITDA margin improved by 150 basis points in 2011, despite revenues declining 7.2% year-over-year.
I often write about the retail industry. One thing investors always get hung up on is same-store sales growth. Many consider this metric the Holy Grail of retail. However, same-store sales growth means squat if those gains in revenue don't come profitably. In fiscal 2006 and 2007, Buckle (NYSE:BKE), my favorite specialty retailer, had flat same-store sales. Yet its net margins were 10.5%. In fiscal 2011, although its same-store sales again grew by just 1.2%, its net margin was 14.2%. As Harvard economics professor Michael Porter likes to say, "If your goal is anything but profitability - if it's to be big, or to grow fast, or to become a technology leader - you'll hit problems." Buckle opens between 10 and 20 stores each year. That's it. Their competitive advantage is understanding how to make money in different economic climates and knowing when to say no.
I believe Bibliowicz and the rest of her management team understand National Financial Partners' competitive advantage and are growing its business based on this understanding. This past year is a perfect example. Its Corporate Client Group generated 60.6% of its adjusted EBITDA on 40.7% of the revenue. Four years ago, this segment generated 42.3% of its adjusted EBITDA on 30.2% of the revenue. Meanwhile, its Individual Client Group segment has become less important to its profit plans, which is a good thing, because it just doesn't generate enough recurring revenue.
Obtaining new business is always more expensive than serving existing clients. In 2011, it paid $62 million in cash for two acquisitions and four sub-acquisitions (owned by NFP but operated by existing management), all providing recurring revenue. It is allocating $80 million to acquisitions in 2012; seeking opportunities to build its scale in the middle market while continuing its assault on recurring revenue. Of the 3.2% revenue growth in 2011, 2.3% was organic with the other 0.9% from acquisitions. You can expect the same in 2012. The important thing to understand is that as long as it grows adjusted EBITDA margins at a pace greater than revenues, its profit picture will continue to be bright. (To know more about acquisitions, read Analyzing An Acquisition Announcement.)
In the past three years, its operating cash flow has consistently been between $115 million and $125 million. Choosing to keep its capital allocation flexible, it's reduced its debt repayment amounts in 2012 and instead will focus on acquisitions and share repurchases. Between May 2011 and February 2012, it bought back 4 million of its shares at an average price of $12.45. Its board has authorized another $50 share repurchase program. I'm assuming it will continue to watch its purchases carefully. The price paid per share for the program that just finished was slightly less than the average of its high and low during the nine month buying spree. While not spectacular, it's done better than many. (For related reading, see A Breakdown Of Stock Buybacks.)
The Bottom Line
Bibliowicz emphasizes that National Financial Partners doesn't manufacture any products; they simply distribute them to financial advisors and other financial professionals. This certainly eliminates much of the conflict that exists in financial services. As I look at its price-to-sales ratio, I can't help but notice it's half of peers such as Aon (NYSE:AON) and Marsh & McLennan (NYSE:MMC). Two years removed from a $600 million goodwill impairment charge, its best days are still ahead of it.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.