Wall Street analysts took a swipe at LPL Financial Holdings Inc. after the leading independent broker-dealer on Wednesday reported flat earnings.
While the company is benefitting from strong industry trends such as attracting new advisers, a string of issues with regulators is increasing general and administrative costs at LPL Financial, weighing on its shares, analysts noted.
Citigroup Global Markets Inc. analyst William Katz cut his investment rating on the company, which has the ticker LPLA, to neutral from buy on Thursday.
“While we see LPLA levered to further (financial adviser and registered investment adviser) growth, the regulatory discussion is likely to weigh on the shares,” Mr. Katz wrote in a report. “Management has yet to instill much confidence that such pressure has peaked, as (general and administrative) lift remains a decisive disappointment.”
Mr. Katz reduced his 12-month price target for LPLA to $52 from $57 per share, a reduction of 8.8%.
UBS Securities analyst Alex Kramm echoed Mr. Katz's sentiments about LPL Financial.
“The company continues to post solid metrics and show an ability to attract investment advisers,” he wrote on Wednesday. “We believe LPLA is exposed to solid industry trends, but we are concerned about the inability to turn a highly accommodative market environment into earnings growth.”
Mr. Kramm maintained his neutral rating on LPLA shares, with a price target of $53.
Thursday afternoon, LPLA shares were down 3.2%, trading at $47.75. The S&P 500 Index, meanwhile was down 1.38%.
“We are encouraged to see management lay out a plan to target these (regulatory) issues, but at the same time, the company's history of missing guidance makes us unsure of whether today's increase to its core (general and administrative) spending outlook will be the last,” Mr. Kramm wrote.
LPL Financial typically does not respond to analysts' comment, and spokeswoman Betsy Weinberger could not be reached Thursday afternoon.
LPL Financial in June
was hit with a $2 million fine and ordered to pay $820,000 in restitution for failing to maintain adequate books and records documenting variable annuity exchanges, known as 1035 exchanges, according to the firm's profile on BrokerCheck.
The previously unreported settlement with the Illinois Securities Department contributed to flat second quarter earnings at LPL Financial Holdings leading the firm's chief executive, Mark Casady to tell analysts on a conference call Wednesday that “We are not happy with these results.”
In its quarterly earnings report Wednesday, LPL reported that general and administrative expenses for the quarter ended June 30 increased 24% to $106.8 million from $84.5 million in the year-ago quarter. The increase was primarily related to the resolution of regulatory issues, the company said in a statement. Earnings per share were also flat year over year, at 42 cents.
For the past year and a half, LPL has been dogged by state regulators examining
sales of investment products including nontraded real estate investment trusts. In February 2013, LPL Financial reached a
settlement with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines over the sale of nontraded REITs.
Last year, the Financial Industry Regulatory Authority Inc.
fined LPL Financial $7.5 million for 35 separate significant e-mail system failures.
LPL also was ordered to create a $1.5 million fund to compensate brokerage customers potentially affected by its failure to produce e-mail.
