We are initiating coverage on
Raymond James Financial Inc.
) with a 'Neutral' recommendation. We anticipate synergies from its
recent acquisition of Morgan Keegan. Moreover, the company's
capital strength and consequent capital deployment through dividend
as well as share repurchase activities should make its stock
attractive to yield-seeking investors. Nevertheless, the
ever-increasing non-interest expenses along with low interest rates
and sluggish economic recovery are expected to act as headwinds to
Along with its subsidiaries, Raymond James provides financial
services that include underwriting, distribution, trading and
brokerage of equity and debt securities and the sale of mutual
funds and other investment products, mainly in the U.S. and Canada.
Apart from these, the company also offers investment management
services, corporate and retail banking and trust services.
Given the acquisition and investment opportunities amidst the
protracted economic recovery, Raymond James is focusing on
inorganic growth. In April, the company completed the all-cash
acquisition of Morgan Keegan and MK Holding from
Regions Financial Corp.
). Moreover, in 2011, the company had acquired Howe Barnes, which
led to the expansion of Private Client Group segment. Going
forward, Raymond James is expected to pursue more acquisitions that
will enhance its market share and top line.
Moreover, Raymond James is a good asset for yield-seeking
investors. The company has a track record of continually raising
dividend over the last decade. Additionally, it is actively
repurchasing its common stock. Given a stable capital position, we
anticipate the company to continue with its capital deployment
activities going forward.
On the flip side, Raymond James continues to face headwinds due to
the increasing operating expenses. Non-interest expenses
continuously increased over the last two fiscal years - 12.5% in
2011 and 10.8% in 2010 - and reached $2.88 billion in 2011. Rising
compensation cost was one of the primary reasons for the swelling
expenses. As a result of the acquisitions, expenses are expected to
increase further, thus pressurizing the bottom line.
Additionally, Raymond James is yet to successfully diversify its
footprint. A major portion (almost 88%) of the company's revenue
comes from its U.S. operations. Though it has operations in Canada
and a few other countries, these are comparatively lower than that
of the U.S. Consequently, the sluggish economic recovery and the
low interest-rate environment in the U.S. could impact its
financials going forward.
Raymond James currently retains its Zacks #3 Rank, which translates
into a short-term Hold rating.
REGIONS FINL CP (RF): Free Stock Analysis
RAYMOND JAS FIN (RJF): Free Stock Analysis
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