Earnings

Critical Comparison: Leucadia National Corporation (LUK) vs. LPL Financial Holdings Inc. (LPLA)

Leucadia National Corporation (NYSE:LUK) shares are down more than -7.13% this year and recently decreased -0.97% or -$0.24 to settle at $24.60. LPL Financial Holdings Inc. (NASDAQ:LPLA), on the other hand, is up 9.68% year to date as of 02/13/2018. It currently trades at $62.67 and has returned 0.13% during the past week.

Leucadia National Corporation (NYSE:LUK) and LPL Financial Holdings Inc. (NASDAQ:LPLA) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LUK to grow earnings at a 18.00% annual rate over the next 5 years. Comparatively, LPLA is expected to grow at a 35.36% annual rate. All else equal, LPLA’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 10.83% for LPL Financial Holdings Inc. (LPLA). LUK’s ROI is 0.50% while LPLA has a ROI of 8.70%. The interpretation is that LPLA’s business generates a higher return on investment than LUK’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. LUK’s free cash flow (“FCF”) per share for the trailing twelve months was +4.59. Comparatively, LPLA’s free cash flow per share was -. On a percent-of-sales basis, LUK’s free cash flow was 16.25% while LPLA converted 0% of its revenues into cash flow. This means that, for a given level of sales, LUK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

LUK’s debt-to-equity ratio is 1.99 versus a D/E of 2.82 for LPLA. LPLA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LUK trades at a forward P/E of 15.19, a P/B of 0.87, and a P/S of 0.72, compared to a forward P/E of 12.09, a P/B of 6.00, and a P/S of 1.32 for LPLA. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LUK is currently priced at a -27.65% to its one-year price target of 34.00. Comparatively, LPLA is -17.06% relative to its price target of 75.56. This suggests that LUK is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.00 for LUK and 2.40 for LPLA, which implies that analysts are more bullish on the outlook for LPLA.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. LUK has a beta of 1.25 and LPLA’s beta is 1.44. LUK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.LUK has a short ratio of 1.83 compared to a short interest of 1.45 for LPLA. This implies that the market is currently less bearish on the outlook for LPLA.

Summary

Leucadia National Corporation (NYSE:LUK) beats LPL Financial Holdings Inc. (NASDAQ:LPLA) on a total of 9 of the 14 factors compared between the two stocks. LUK has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, LUK is the cheaper of the two stocks on book value and sales basis, LUK is more undervalued relative to its price target. Finally, ETFC has better sentiment signals based on short interest.

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