27 May 2010

BR: Financial Gauge Analysis for the March 2010 Quarter

Broadridge Financial (NYSE: BR) earned $0.18 per share on a GAAP basis in fiscal 2010's third quarter, which ended 31 March.  Reported earnings were 38 percent less than the $0.29 per share Broadridge earned in the same quarter of 2009.

Earnings from continuing operations fell from $0.29 per share to $0.22 in the latest quarter. 

In our earlier review of Broadridge's Income Statement, we compared the actual results to our "look-ahead" estimates.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Broadridge and the associated financial gauge scores.  The metrics were calculated using data from Broadridge's current and historical financial statements, including the latest 10-Q report.

Broadridge Financial Solutions, Inc., provides brokerage and other services to financial companies.  The Investor Communication Solutions business, which distributes and processes proxies for public companies and mutual funds, contributed more than 70 percent of Broadridge's revenue and pre-tax earnings in fiscal 2009.  Broadridge's Securities Processing business in fiscal 2009 "processed on average over 1.6 million equity trades and over $3 trillion in trades of United States (U.S.) fixed income securities per day."  Additional 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:

Broadridge's relatively short existence as an independent entity, plus the ongoing turmoil in the financial industry, has caused its scores to vary more from quarter to quarter than most other companies.  Automatic Data Processing, Inc. (NASDAQ: ADP) spun off Broadridge on 30 March 2007. 

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 Management31 Mar 201031 Dec 200931 Mar 20093-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)56.554.859.156.9
Working Capital/Revenue25.5%25.1%23.3%22.7%
Cash Conversion Cycle Time (days)39.037.639.237.6
Gauge Score (0 to 25)88178

Even though Broadridge's Long-term Debt of $324 million hasn't changed in more than a year, the ratio of Debt-to-Equity has come down steadily as Retained earnings have lifted Shareholders Equity.  Retained earnings increased from $325 million in March 2009 to $460 million in March 2010.  This increase (and the Cash Flow that underlies it) provides a more solid (i.e., less leveraged) foundation for bearing the debt.

Over the last 12 months, Broadridge increased its Working Capital -- the difference between Current Assets and Current Liabilities -- from $512 million to $559 million.

In a sign of improved Cash efficiency, the number of Days of Sales Outstanding was less in March 2010 than March 2009.  Additional progress in this area, which would also be reflected in the Cash Conversion Cycle Time, would boost the Cash Management gauge score.

Growth31 Mar 201031 Dec 200931 Mar 20093-Yr Avg
Revenue growth2.1%-0.7%-1.8%0.8%
Operating Profit growth7.9%10.4%7.2%4.8%
CFO growth17.6%15.5%-21.8%-3.1%
Net Income growth10.1%22.1%6.2%0.9%
Gauge Score (0 to 25)181244
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.  Broadridge was part of ADP during some of this period.
3. Cash Flow from Operations excludes securities clearing activities.

Revenue in the March 2010 quarter was enough to return the trailing-year Revenue growth rate to positive territory.  The company credits higher fee revenues (primarily related to mutual fund proxies) and distribution revenues for recent revenue growth.  Foreign currency exchange rates have also boosted revenues.

The Net Income growth rate in the table excludes losses from discontinued operations.  Earnings grew faster than Revenue primarily because the effective income tax rate was lower.

Lower taxes also benefited Cash Flow from Operations.

Profitability31 Mar 201031 Dec 200931 Mar 20093-Yr Avg
Operating Expenses/Revenue83.6%83.0%84.4%84.0%
Free Cash Flow/Invested Capital33.0%31.9%30.5%31.5%
Accrual Ratio-0.1%-0.1%-0.5%-1.2%
Gauge Score (0 to 25)1616149

The Operating margin has been stable, with a slight improvement bias.

The two return on Invested Capital ratios, and their upward trends, are impressive and have kept the Profitability score high. 

A negative Accrual Ratio (a good sign for Earnings Quality) indicates that Cash Flow from Operations less Cash Used for Investment exceeded Net Income.  We use trailing-year figures for each item.

Value31 Mar 201031 Dec 200931 Mar 20093-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)0113
Share Price ($)$21.38$22.56$18.61-

Broadridge's share price increased 14.9 percent in the year ending 31 March 2010.  Since this rate outpaced Sales and Earnings, the Value gauge was not able to move up.

However, the share price has since been cut to around $19 per share.  This reduces the P/E multiple to near 13, and the Price/Sales ratio to 1.2.

Overall31 Mar 201031 Dec 200931 Mar 20093-Yr Avg
Gauge Score (0 to 100)32323324

The Growth and Profitability scores are favorable, but Value remained a concern at the end of the March quarter. 

Earnings may soon benefit from a seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney.  The sale of the Securities Clearing business, announced last November, to Penson Worldwide (NASDAQ: PNSN) is expected to close before the end of June 2010.

Full disclosure: Long BR at time of writing.

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