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Published: May 24, 2010
Many publicly-traded firms are in a steady
state of flux, acquiring rivals and jettisoning businesses no
longer deemed core to the
parent company's mission. Both situations can be lucrative
for astute investors -- buyouts can deliver big premiums over
current market values, and spinoffs can create an opportunity
for new management teams to rejuvenate a former corporate step
child and unlock hidden upside value for shareholders.
Once such firm was spun off from paycheck processing giant
Automatic Data Processing (NYSE: ADP) to shareholders in
March 2007. Ironically, its business is handling
proxy materials for corporate actions like votes on board
memberships, takeovers and, in this case, a spinoff. But luckily
for value-minded investors, ADP's trash could very well turn out
to be a treasure find.
Broadridge (NYSE: BR) bills itself as a technology-based
solutions provider to the financial services industry. Its
flagship business consists of processing proxy materials related
to equity security and mutual fund corporate actions. Best known
for its
www.proxyvote.com website, the unit accounts for 75% of
total company revenues and also helps institutions track and
maintain proxy votes and related corporate activities through a
service called ProxyEdge.
Securities processing comprises the second unit and helps
financial clients take care of their investment transactions.
This includes desktop applications, performance reporting and
related
portfolio management functions to help keep records, settle
trades and trade securities. All told, the company expects to
handle more than two million trades a day and generate about
$540 million in revenue, or 25% of sales.
A very positive recent development occurred when Broadridge
announced it was selling its underperforming transaction
clearing and settlement division to Penson Worldwide (Nasdaq:
PNSN) for between $60 million and $70 million. The division
had been experiencing modest revenue growth but was mired in the
red for some time. The company expects the deal to close later
this year. Also as part of the transaction, Broadridge will
receive $65 million to $75 million in additional securities
processing revenue as Penson signed a 10 year agreement to
outsource processing and related back office functions to
Broadridge. This is a win-win situation for Broadridge.
Its operating mix sounds pedestrian and
mundane, but Broadridge garners fat profit margins. Its business
generate lots of cash and the company doesn't cost that much to
run and maintain. Plus, clients have little choice but to go
with Broadridge -- last year it processed some 70% of all proxy
services in the United States. This isn't a bad thing either, as
scalability and an installed base of users means the cost can be
quite reasonable for customers.
The downside to this dominance is that Broadridge has most of
the market wrapped up, which makes it tough to grow. Sales have
grown only slightly during the past three years since the
spinoff. However, growth trends should pick up.
For starters, the firm is still getting used to being
independent and benefiting from not having a corporate parent
siphon off capital for its own benefit. The benefit to
shareholders is a rising dividend payment (the stock yields just
under 3%) and share buybacks, both of which should continue to
increase as Broadridge pays off the $690 million payment it made
to ADP during the spinoff, while generating plenty of excess
capital.
The elimination of the transaction clearing business will
further boost profitability. Management has touted a steady slew
of new business sales and impressive customer retention levels
of about 98% in the core operating segments. The demise of major
institutions including Bear Stearns, Lehman Brothers and a host
of banks across the country has eliminated existing and
potential clients of Broadridge, but further upside exists once
global financial markets settle down..
The current share price only discounts about +1%
free cash flow growth during the next decade. If Broadridge
can achieve +5% annual improvements in free cash, then the stock
is undervalued by about -36%. And a double-digit growth rate
means the stock could double from current levels.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
