In just six months and a few days, the share price of Raymond James Financial Inc. (RJF, Financial) fell 30.45%. On Nov. 10, 2022, it hit an all-time high of $123.98, and by the close on May 16, it was down to $86.22.
Did something big occur? Did the diversified financial services company have something cataclysmic happen? Apparently, it was just Mr. Market on another one of his random walks.
How do we know? Over the past three years, its average annual revenue growth rate was 12.50%, while earnings per share without non-recurring items grew by an average of 13.50% per year. However, earnings growth was bumpy over that period, which may have caused some investors to shy away.
Patient investors would have ridden out those ups and downs, but short-term investors and traders likely sold and bought the newest bright thing.
But how much faith can we have in the patient investors? Are they wise or simply hanging on despite their losses?
To begin, Raymond James is diversified and brings in revenue from several different segments:
It also has a 61-year history in the financial industry, which means it can call on extensive experience when confronting new challenges.
For many businesses, current short-term interest rates would be a challenge. But as Raymond James reported in recent earnings reports, it is a net beneficiary of these higher rates.
It also claims in its 10-K for the year that ended Sept. 30, 2022 that it maintains a conservative, long-term focus in its decision-making. That suggests the company is less likely to make bad deals or pursue capital-destroying ideas.
As this chart shows, its return on invested capital has been greater than its weighted average cost of capital every year for the past dozen years.
Overall, its fundamentals are reasonable, but not exciting. In part, that is due to a low financial strength ranking of 4 out of 10. In turn, that reflects the nature of its financial businesses.
Raymond James’ profitability is somewhat stronger at 7 out of 10. It has a net margin of 15.15%, a return on equity of 17.67% and has been profitable in each of the past 10 years.
Revenue and earnings per share without NRI have grown at about an average rate for the capital markets industry over the past three years. Revenue has grown by an average of 12.50% per year, while earnings per share without NRI has averaged 13.50%.
Similarly, its three-year book growth rate has averaged 10.90%.
Acquisitions have supplemented organic growth, with Raymond James being an active buyer. In the annual report for 2022, it noted, “As the firm marks 60 years, our commitment to augmenting organic growth with key strategic acquisitions continues as we welcome fixed income market maker, SumRidge Partners; banking and investment firm, TriState Capital; and U.K.-based wealth management firm, Charles Stanley.”
Of course, one of its sources of revenue is advising clients on their acquisitions and mergers.
It currently pays a dividend yielding 1.75%, based on its May 17 price of $87.53. As the following chart shows, it has increased the dividend per share from 9 cents in 2013 to 42 cents this year.
As for share repurchases, Raymond James has been on a bit of a roller coaster. Shares outstanding reached 224.10 million in 2018, fell to 208.95 million in 2020, went up to 220.70 million in 2022 and this year dropped back to 219.20 million.
Overall, the numbers posted for profitability, growth and returns to shareholders paint a picture of a stable, growing company. It knows how to build its revenue, generate earnings and to return the non-growth portion of its profits to shareholders.
How much would you have to pay to buy this package of current and future returns? At the moment, the share price lags both recent highs and its 10-year trendline.
The GF Value Line assesses the current price as modestly undervalued. Based on historical multiples, a proprietary adjustment factor for previous returns and growth and future estimates, the GF Value is estimated at $107.72. That’s 23.06% higher than the current price of $87.53.
The price-earnings ratio comes in at 11.53, which is below the industry average of 16.89. The PEG ratio, which is calculated by dividing the price-earnings ratio by the five-year Ebitda growth rate, is 1.05, which is at the bottom of the fair price range.
Because Raymond James’ predictability ranking is high at five out of five stars, we can have confidence in the discounted cash flow forecast. It sees a 57.46% margin of safety.
The consensus suggests the company is undervalued, likely between 23.06% and 57.46%.
Nine gurus followed by GuruFocus had stakes in Raymond James at the end of the first calendar quarter, according to 13F filings. PRIMECAP Management (Trades, Portfolio) has a significant position of 12,836,557 shares, representing 6.06% of Raymond James shares outstanding and 1.04% of its own portfolio.
Glenn Greenberg (Trades, Portfolio) of Brave Warrior Advisors had 2,176,510 shares and Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 532,022 shares.
Institutional investors have invested heavily with 77.99% of shares outstanding. Insiders also hold a significant position with 7.69% of shares. The latter reflects the deep position of Thomas A. James, the chairman emeritus and son of founder Robert James. He owned 13,339,786 shares as of December 2016.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
In conclusion, Raymond James Financial is a solid, profitable and growing company. It is also available at a discount, at least for now.
