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‘Firing on All Cylinders’: Why Analysts Are Suddenly Fawning Over Focus Financial

The company beat fourth-quarter expectations and reaffirmed its 2020 growth targets.

Focus Financial Partners (ticker: FOCS) announced fourth-quarter results before Thursday’s market open that handily exceeded analysts’ estimates. Shares surged 10% on the day, weakening doubt about the company’s viability or growth. Shares fell fractionally Friday to $33.91 on a down day for stocks.

The serial acquirer of RIAs reported a loss of $12.7 million in the fourth quarter after being modestly profitable through 2019. It finished the year with a loss of $12 million. But Focus Financial continued to grow. It also expanded its margin, and lowered its leverage ratio. 

Non-GAAP net income of $56 million was 52.3% higher year over year in the fourth quarter, while adjusted net income per share increased 47.1% to $0.75, 14 cents above estimates. The company reported Non-GAAP income of $178.6 million, up 42.5% year over year for 2019. Revenue rose 38% to $340.2 million.

“The company is firing on all cylinders, in particular margin expansion, de-levering and international expansion,” Oppenheimer analysts wrote in a Feb. 20 note.

If the stock can hold recent gains, this earnings report may represent a turning point for investors who have been on a roller coaster ride in the past year, with shares trading as high as $40.36 and as low as $19.05.  

For a relatively small company, with a market capitalization of $2.4 billion, Focus Financial has attracted particular attention. Perhaps because it is only publicly-traded RIA consolidator in a fast-growing part of financial services.

There’s been a little noise surrounding it. Two investment firms that each owned more than 5% of the public shares shrunk their positions last year, and a tiny investment manager recently published its thesis for shorting the stock. But analysts have stayed bullish and are even more so now.

During Focus Financial’s Investor Day on Nov. 20, management projected a long-term adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization) margin of roughly 24%. Thursday, the company reported a “stellar” margin result of 24.4%, according to Oppenheimer analysts. “Although the FY19 margin was 22.1%, we believe management is a bit conservative given that the company will continue to scale up. We wouldn't be surprised if the management raises its long-term margin target by 2025.”

In the second quarter of last year, after the company’s leverage ratio—its borrowings outstanding relative to cash and equivalents—rose above 4-times, observers expressed concern about prolific dealmaker’s financial vulnerability.

“Is there any level that you guys are uncomfortable at?” Michael Carrier, an analyst at Bank of America’s Merrill Lynch, asked about the leverage ratio, asked at the time during the second quarter earnings call. 

The leverage ratio increased again in the third quarter to 4.3-times, but the company appeared vindicated. It continued to grow its revenue, deliver a small profit, and keep the leverage ratio in check, within its target range of 3.5 to 4.5-times.

Oppenheimer analysts were looking out for a “healthy leverage ratio within guidance” that could lift shares. Instead, Focus Financial did one better, de-levering for the first time since it went public in July, 2018 at $33.

Citing the same reasons, analysts at RBC Capital Markets gave strength to their Outperform rating on the stock, increasing their target price to $41 from $39, or 12-times their 2012 fiscal year’s estimated adjusted earnings per share of $3.44.

The pipeline of mergers and acquisitions, by both Focus Financial itself and its partner firms that it buys equity stakes in, also remained strong. The group of partner firms grew 9% year over year to 63 in 2019. The company also announced this week it added another in Australia, bringing the total to 64. “We believe the opportunity creates another growth engine for top-line revenue which could result in continued margin expansion,” Oppenheimer analysts wrote about Focus Financial’s highlighting of opportunities abroad.

In aggregate, the companies affiliated with Focus Financial include more than 2,700 wealth-management-focused principals and employees.

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