LPL Financial: Increasing Our Valuation as Client Asset Growth Offsets Rate Headwinds

We are increasing our fair value estimate for narrow-moat LPL Financial LPLA to $289 from $273 per share. Our fair value estimate correlates to a price/forward adjusted earnings multiple of 18 times and an enterprise value/EBITDA multiple of 12 times. There were multiple adjustments that led to the net $16 increase in our fair value estimate with some of the larger contributors being earnings since our previous valuation update, increasing our forecast promotion expenses, modeling interest rates staying higher for a longer period of time, decreasing our long-term growth rate for client assets, and increasing near-term asset growth for announced partnerships. We forecast a 10-year compound annual growth rate of around 8% to 9% for both revenue and gross profit. We expect operating margins to be in the mid- to high teens over the next couple of years, as the company benefits from high short-term interest rates, and to normalize at about 19%. Gross profit in 2023 could increase over 20%, as the company benefits from continued high interest rates. However, when the U.S. Federal Reserve begins to lower interest rates because of a successful soft landing or to combat a recession, gross profit growth will likely move into a mid- to high-single-digit range.