20 August 2009

BR: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined Broadridge Financial's (NYSE: BR) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Broadridge earned $0.83 per share in this fourth quarter of fiscal 2009, up from $0.69 in the comparable period of 2008.

Broadridge Financial Solutions, Inc., provides investor communication, securities processing, and clearing services to financial companies.

We have now mined Broadridge's financial statements in its 10-K annual report to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.

In summary, Broadridge's latest GCFR gauge scores are as follows:

The variability of Broadridge's scores from quarter to quarter has been magnified because the company's relatively short existence as an independent entity.

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementJun 2009Mar 2009Jun 2008
Current Ratio1.41.41.4
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/A
Finished Goods/InventoryN/AN/AN/A
Days of Sales Outstanding (days)67.659.975.9
Working Capital/Invested Capital82.6%78.0%57.6%
Cash Conversion Cycle Time (days)48.539.155.3
Gauge Score (0 to 25)191417

With the exception of the Current Ratio, Broadridge's liquidity and debt ratios have improved.  Debt/Equity has been slashed in the last year.  Even though Cash Flow from Operations has declined, Debt was reduced even more.  In other words, the Debt can be covered with the Cash Flow from a shorter period. 

Days of Sales Outstanding and the Cash Conversion Cycle Time, which are related measures of Cash efficiency, have also improved compared to last year. 

GrowthJun 2009Mar 2009Jun 2008
Revenue growth (1)-2.6%0.7%3.3%
Operating Profit growth (2)8.7%7.0%10.6%
CFO growth (1, 3)-16.0%-21.8%16.2%
Net Income growth (1)16.2%5.7%-2.5%
Gauge Score (0 to 25)636
1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. 
2. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
3. Cash Flow from Operations excludes securities clearing activities.

Revenue and Cash Flow have been under pressure.  The decline in Revenue for the fiscal year was close to the bottom of the "-3% to flat" range forecast by the company. 

However, lower expenses and a tax benefit boosted Operating Profits and Net Income.

ProfitabilityJun 2009Mar 2009Jun 2008
Operating Expenses/Revenue83.7%84.9%83.8%
Free Cash Flow/Invested Capital30.6%30.5%28.5%
Accrual Ratio1.1%-0.5%-3.2%
Gauge Score (0 to 25)151416

The ROIC and FCF/IC ratios are impressive and have kept the Profitability score high.  The rise in the Accrual Ratio indicates that there is less Cash Flow backing up Net Income and that signals weaker Earnings Quality).

ValueJun 2009Mar 2009Jun 2008
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)1013

Broadridge's share price fell 10.9 percent during the June quarter, from $18.61 to $16.58.  The lower price was much more pleasing to the Value gauge.  (The gauge scores in the table above were calculated using the quarter-end prices, per GCFR standard practice.)  

However, the shares have already moved over $20, which is a price that would trim several points from the Value score.  We didn't recognize this opportunity quickly enough.  C'est la vie.

Broadridge's valuation ratios can be compared with other companies providing Business Services.

OverallJun 2009Mar 2009Jun 2008
Gauge Score (0 to 100)523039

The Cash Management and Value gauges responded well to the financial data from the June quarter, and the Profitability gauge was already giving a favorable reading.  Growth, as for many companies, lagged.

The recent earnings announcement, which included a rare doubling of the annual dividend, triggered an 11-percent rise in Broadridge's share price over the next few trading days.  The price surge wiped several points from the Value gauge score, which has a ripple effect on the Overall gauge.  At this point, we think value investors considering this company would be better off waiting to see if the shares retrace some of the recent gains.

Full disclosure: Long BR at time of writing.

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