Citigroup: Book profits on LPL stock now

Citigroup Inc. has put a damper on the coming-out party that Wall Street has thrown for LPL Investment Holdings Inc.

Last week, Citigroup’s brokerage unit, Citigroup Global Markets Inc., began its coverage of the company with a “sell” rating, which stands in stark contrast to the enthusiastic ratings and stock price targets that Wall Street investment banks bestowed on LPL last month.

Citigroup, which was a co-manager of the LPL offering but wasn’t a book runner, set a 12-month price target of $32 the firm’s shares.

The stock, which made its debut in November and trades under the ticker symbol “LPLA,” was selling at a near $34 a share last week. The stock price spiked at $37.22 in late December.

“Given the sizable run-up in the stock since its [initial public offering], we ran two stress tests to see how much “good news’ is already discounted,” Citigroup analyst William Katz wrote in a report.

“Our analysis suggests investors already discount above trend equity markets and 250 [basis points] of rate hikes by [the end of next year], well ahead of most consensus expectations. We are inclined to book profits,” Mr. Katz wrote.

The $32 price target works out to about 15 times LPL’s earnings-per-share estimate for LPL by Citigroup, he noted. At current prices, the stock is expensive, Mr. Katz wrote.

The company “already commands among the highest valuations across our coverage universe, which may not be fully sustainable,” he wrote.

“Our initial rating is a valuation call, as LPLA appears priced for perfection out of the IPO gates and subject to a pullback, we believe,” Mr. Katz wrote. “Long-term, we like LPLA’s positioning within the fast[er] growing independent channel, superior economics LPLA offers embedded [financial advisers], and that the model can be leveraged and that [free cash flow] should drive further deleveraging.”

When asked about the rating, LPL spokesman Michael Herely said that as a matter of policy, the company doesn’t comment on sell-side research reports about the firm.

There have been plenty of those of late. Last month, a number of investment banks that were involved in the IPO issued initial ratings on LPL.

The Goldman Sachs Group Inc., one of LPL’s lead underwriters, issued a “buy” rating on the company, with a $40 price target, according to StreetInsider.com, a website that tracks stock ratings and financial information. Co-manager William Blair & Co. LLC rated LPL “outperform,” and J.P. Morgan Securities Inc., another book runner on the deal, started coverage with a “neutral” rating — but a price target of $38.50.

LPL’s stock launched at $30 a share.

E-mail Bruce Kelly at [email protected].