Barclays analyst latest to give LPL Financial shares room to run

With a nod toward LPL Financial Holdings Inc.'s recent successes in both recruiting financial advisors as well as signing up large outside firms like banks to use its platform, Barclays Equity Research slapped a brand-new "overweight" rating on shares of LPL Financial (LPLA).

As Barclays initiated its coverage of LPL Financial last Thursday, it set a price target of $275 per share for the company, which were trading near $244 close to midday on Monday. LPL recently reported $1.24 billion in client assets as of June 30.

Over the summer, other analysts also cited the potential for further appreciation in the share price of LPL Financial, the largest wealth management firm in the country by financial advisor head count, with some 21,000 advisors across its varied work platforms.

In July, CFRA Research raised it price target on LPL Financial shares by $32 to $266, saying that the firm's forward price-to-earnings ratio of 16 times its current earnings per share estimate for this year was "a premium to peers due to strong organic growth and impressive advisor recruitment.”

And in August, Wolfe Research bumped its price target to $265 per share, an increase of $36; that came after LPL Financial announced that Prudential Financial Inc. is moving $50 billion in the retail brokerage and investment advisory assets of 2,600 financial advisors from Prudential Advisors’ current custodian, Fidelity’s National Financial Services, to LPL Financial.

Barclays also outlined reasons for a potential downside to shares of LPL Financial, all of would undermine firms across the wealth management industry.

"Our downside case assumes macro softness resulting in slower growth in advisory and brokerage assets at LPL, a more rapidly declining (interest) rate curve, lower cash balances, and slower advisory conversions," according to the investment bank.

But as part of its recommendation of LPL shares, Barclays focused on last month's win of Prudential's retail business. In such instances, LPL does not buy the wealth management business from the institution, but becomes the technology and service provider for firms like Prudential.

"LPL has had an enterprise offering for many years — the company reportedly serves more than 1,000 enterprises — but historically focused on serving smaller banks and credit unions," according to Barclays. "In the past several years the company has focused on expanding its capabilities to address the needs of larger enterprises, making investments geared toward improving the end-client experience and building middle and back-office operations, while also reducing these entities’ in-house compliance and risk needs."

"The pitch to enterprises is also fairly straightforward," Barclays noted. "For many smaller banks and credit unions, offering brokerage and/or wealth management services are not core focus areas. When offered, these services tend to be focused primarily on commission-based brokerage relationships (selling annuities, mutual funds, etc.), and without a third-party services provider, the capital and technical requirements to build out a more advisory-centric experience can be quite cumbersome."

"Outsourcing these back-end services to a third-party services provider like LPL can help these institutions improve their end-client experience, attract new advisors, and free up capital to invest elsewhere," Barclays added. "Enterprise assets have also approximately doubled from $145 billion in 2018 to about $300 billion as of (June 30,) and this looks set to continue as LPL adds new partners."