LPL upgraded, but what's changed?

A little more than a year after slapping a “sell” rating on LPL Financial Holdings Inc. (LPLA), UBS analyst Alex Kramm upgraded the stock this week to “neutral.” He increased the price target of the stock's shares to $42 from $33. The firm was trading at $41.91 Tuesday afternoon. What's changed at LPL in the past 14 months to warrant the slightly rosier outlook from Mr. Kramm? Foremost is the potential for continued growth at the firm, which has more than 13,000 independent financial advisers and registered reps. After struggling — as did competitors — in the first half of the year with recruiting, LPL added 153 net new advisers in the quarter ended in September. “We believe LPLA represents a pure play on growth in the independent adviser space, one of the most well-documented trends in the financial services industry,” according to Mr. Kramm's research note. Looming interest rate increases and the possibility of adding a bank, which management has recently discussed, also underpin Mr. Kramm's new neutral rating. “With a potential hike in short-term interest rates also appearing closer, we believe LPLA also represents an underappreciated play on rates, while the potential to operate a bank could drive incremental upside,” he wrote. “Lastly, LPLA's significant cash flow allows the company to buy back a significant amount of its stock, which should support the shares.” Mr. Kramm downgraded LPL in September 2012 for underperforming its peers and posting “virtually no earnings growth” over the first half of 2012. A year ago, it was trading in the $25 a share range.