Is Stifel Stock Undervalued?

While names like JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) grab the headlines in the banking world, Stifel Financial (NYSE:SF) has carved out a path to success that has flown under the radars of many investors.

It’s a bank holding company that has a presence spanning geographies ranging from Canada to Europe, and offering retail as well as institutional wealth management services.

It also caters to corporations and municipalities with investment banking offerings. Whether a client needs commercial banking services or is going public, Stifel has the means to serve them.

Its breadth of products across numerous geographies has translated to impressive financials and rewarded shareholders handsomely. In spite of the gains, management has embarked on a share buyback scheme, so is Stifel stock a bargain still?

Stifel Has Focused On Stable Revenue Streams

In the banking industry, it’s tempting to practice what you preach by acquiring other firms and rivals and rolling up corporations into giant behemoths. Look no further than TD Bank and Truist as a recent examples of the practice. Stifel is no different in that regard and has grown largely through acquisitions.

The inorganic growth strategy has been essential to its success, enabling Stifel to more rapidly expand its client base and geographic reach. The approach is not risk-free and is accompanied by integration risks, whether operational or cultural. Still, Stifel has largely succeeded in this challenging game by keeping employee retention high while simultaneously sustaining high client satisfaction rates.

The company’s broad suite of products and services has been instrumental in its success too with revenues almost doubling over the past decade. The combination of wealth management, investment banking, asset management, and sales and trading services offers a cushion against market whims.

During the Great Recession, a lot of firms that focused solely on investment banking ran aground when that market dried up. Across the industry, a renewed focus on wealth management emerged in order to provide a steady stream of fees that could stabilize revenues during difficult economic periods. Like Bank of America that made a concerted effort on financial advisory services through Merrill, Stifel has been successful in growing its assets under management too.

For investors, the question is whether the strategic focus has translated to financial success?

Stifel Financials Get Stronger By The Year

Looking back of the past decade, the top line isn’t the only thing to excite investors. Earnings per share are up almost 200% during the same time window from $1.57 per share in FY 2014 to $4.28 per share in the most recent annual reporting period.

Stifel management has succeeded in growing the all-important cash line item on the balance sheet over the past decade too. It’s up from $689 million to $2.2 billion during that same window. Notably while cash is up about 3x, long-term debt has grown by around 2x from $532 million to $1.1 billion.

A strong income statement and balance sheet usually translate into solid cash flows, and that’s the case for Stifel too with levered FCF up from $223 million a decade ago to $1.07 billion last year. In fact, only once in the past ten years have cash flows fallen into the red.

So with a solid business model and stable, and growing financials, is Stifel a good investment now?

Is Stifel Stock Undervalued?

According to 7 analysts, Stifel stock is 4% undervalued with a fair value consensus price target of $79.64 per share.

Notably, Stifel’s dividend is 1.93% and a dividends stable growth valuation model would place the intrinsic value of the firm substantially higher at $107 per share.

That might explain why management has been so buoyant on the firm’s prospects with the Board of Directors authorizing a share repurchase scheme.

In October, the company announced an increase in the buyback from 10 million to 14.2 million shares.

For new investors, it’s worth highlighting that, at the time, Stifel share price was trading about 25% lower than where it sits today, so the margin of safety has certainly diminished in the interim period.

Time to Buy Stifel?

Stifel share price has had a good run up over the past few months, rising by around 25% from its October lows but looking forward analysts have increasingly expressed bearish sentiments with three revising their estimates lower for the coming year.

With that said, the prior trend of profitability is unlikely to be interrupted over the coming months and indeed year. Expect cash flows to remain strong also and no interruption to the 7-year streak of hiking dividends.

Speaking of which, the yield of 1.93% now and accompanying payout of $1.44 per share is more likely to continue or rise in the coming years, so passive investors can take solace knowing a cushion exists on their holding even if the share price pulls back.

One strong point of optimism for shareholders now is that a further buffer under the stock now exists due to the share repurchase scheme in place.

With all that said, the share price movement in recent months has the hallmarks of being parabolic in nature and so an air pocket could well lie close up ahead. Rather than chase the stock higher at this time, it may be a more prudent move to wait on the sidelines for a better reward to risk ratio to present where the discount to fair value and analysts’ consensus is even more pronounced.

The bottom line is Stifel has demonstrated a proven strategy for revenue generation and bottom line profitability that produces attractive cash flows and a solid dividend yield but the share price has moved so rapidly that a better entry point likely lies up ahead. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.