In a previous article, we examined Broadridge Financial's (NYSE: BR) Income Statement for the first quarter of fiscal 2010 and compared the entries on each line to our "look-ahead" estimates. Earnings in this period, which ended 30 September 2009, fell from $0.25 per share to $0.19.Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.
Broadridge Financial Solutions provides investor communication, securities processing, and clearing services to financial companies. Some background information about Broadridge and the business environment in which it is currently operating can be found in the look-ahead.
In summary, Broadridge's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 15 of 25 (down from 19 in June)
- Growth: 5 of 25 (down from 6)
- Profitability: 16 of 25 (up from 15)
- Value: 2 of 25 (down from 10)
- Overall: 35 of 100 (down from 51)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
| Cash Management | Sep 2009 | Jun 2009 | Sep 2008 |
| Current Ratio | 1.4 | 1.4 | 1.2 |
| LTD/Equity | 37.4% | 35.7% | 42.1% |
| Debt/CFO (years) | 1.1 | 1.1 | 2.0 |
| Inventory/CGS (days) | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 53.8 | 67.6 | 57.0 |
| Working Capital/Invested Capital | 71.7% | 82.6% | 55.2% |
| Cash Conversion Cycle Time (days) | 36.1 | 48.5 | 38.4 |
| Gauge Score (0 to 25) | 15 | 19 | 15 |
Over the last 12 months, Broadridge has strengthened its Balance Sheet by, for example, increasing Working Capital -- the difference between Current Assets and Current Liabilities -- from $462.8 million to $551.6 million. This improvement is reflected in Current Ratio and the Working Capital ratio.
Long-term Debt, at $324 million, has not changed over the last year. However, retained earnings have lifted Shareholders Equity by $98.5 million (a 12.8 percent increase).
Debt can now be covered with just over one year's Cash Flow from Operations.
Days of Sales Outstanding and the Cash Conversion Cycle Time, which are related measures of Cash efficiency, have also improved compared to last year. More progress lowering these figures would help the gauge score.
| Growth | Sep 2009 | Jun 2009 | Sep 2008 |
| Revenue growth (1) | -4.2% | -2.6% | 3.7% |
| Revenue/Assets | 64.9% | 76.6% | 71.1% |
| Operating Profit growth (2) | 5.0% | 8.7% | 8.5% |
| CFO growth (1, 3) | 3.3% | -16.0% | -13.2% |
| Net Income growth (1) | 11.6% | 16.2% | -6.3% |
| Gauge Score (0 to 25) | 5 | 6 | 1 |
2. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters. Broadridge was part of ADP during some of this period.
3. Cash Flow from Operations excludes securities clearing activities.
Trailing-year Revenue growth has been negative for the last two quarters, and even more so than we expected. Broadridge blamed the Revenue decline in the September quarter on decreased distribution activities in the Investor Communication Solutions business, the loss of some clients, price concessions to retain other clients, and unfavorable foreign currency exchanges.
Despite the contraction on the top line of the Income Statement, reduced expenses and a tax benefit enabled Broadridge to increase bottom-line Net Income by a healthy (for this market) 11.6 percent.
Cash Flow had been lagging, but this important measure is now showing positive, if admittedly modest, growth on a trailing-year basis.
| Profitability | Sep 2009 | Jun 2009 | Sep 2008 |
| Operating Expenses/Revenue | 83.9% | 83.7% | 84.7% |
| ROIC | 27.7% | 27.1% | 20.9% |
| Free Cash Flow/Invested Capital | 32.4% | 30.6% | 24.8% |
| Accrual Ratio | 0.1% | 1.1% | -0.8% |
| Gauge Score (0 to 25) | 16 | 15 | 11 |
Operating expenses as a percentage of Revenue have been stable.
The ROIC and FCF/IC ratios are impressive and have kept the Profitability score high.
Good Cash Flow in the September quarter brought the Accrual Ratio down. We consider more Cash Flow backing up Net Income, if sustained, to be a sign of improved Earnings Quality.
| Value | Sep 2009 | Jun 2009 | Sep 2008 |
| P/E | 13.2 | 10.5 | 11.4 |
| P/E vs. S&P 500 P/E | 0.6 | 0.5 | 0.6 |
| PEG | 2.7 | 1.2 | 1.3 |
| Price/Revenue | 1.3 | 1.1 | 1.0 |
| Enterprise Value/Cash Flow (EV/CFO) | 9.5 | 7.6 | 8.1 |
| Gauge Score (0 to 25) | 2 | 10 | 12 |
Broadridge's share price increased a remarkable 21 percent in the September quarter, from $16.58 to $20.10. Over the previous 12 months, the increase was more than 30 percent.
Since the rate of increase in earnings did not match the price rise, the multiples have expanded and Value score has come down.
| Overall | Sep 2009 | Jun 2009 | Sep 2008 |
| Gauge Score (0 to 100) | 35 | 52 | 46 |
The Cash Management and Profitability scores remain favorable, but Growth has been weak, and the surging share price really hurt the Value gauge. Although, trailing-year Revenue growth has recently been negative, Broadridge recently hiked its estimate for fiscal year Revenue growth to a range between plus 6 and plus 8 percent.
Greater confidence in the overall financial services industry could explain part of the share price rise, but news emanating from Broadridge is probably also boosting the shares. Broadridge decided earlier this year to double its annual dividend, which is a tangible expression of management's confidence in the company. In addition, Broadridge recently signed a seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney.
Furthermore, Broadridge agreed to sell "clearing client contracts" to Penson Worldwide (NASDAQ: PNSN) and a related company. Broadridge indicates that this will free up cash that had to be set aside as regulatory capital to meet securities clearing requirements.
More recently, Broadridge was listed as the top Brokerage Services Outsourcing Provider for the second consecutive year in the Black Book of Outsourcing.
Full disclosure: Long BR at time of writing.
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