In wake of Goldman Sachs presentation, Focus Financial shares hit new lows, analyst compares RIA rollup to GM's ill-fated Hummer H-1
The roll-up's share price closed at $25.51, a steep drop from the $37 where it traded on day one -- and even below the targeted $33. But is it really the ungainly, inefficient, over-priced SUV or more the Ferrari CEO Rudy Adolf promised but thrashed by an unruly market?
Brooke's Note: It's a bad time to be in stocks. Ask Mark Zuckerberg, Jeff Bezos or Lawrence Culp. It happens to the best of'em. But Focus Financial's CEO Rudy Adolf may have made an unforced error in IPO pricing overreach that puts his firm in its first few months of trading into a position that is particularly concerning. That could end up becoming a worry for the wider RIA business. Focus Financial is the comparable. Of course, Focus could help its own case by doing more deals. Mercer Advisors seems to be doing more with less. See: Lisa's Bits: Commonwealth and Cambridge jump into RIA custody game bigger But Focus did report three deals on Dec. 17th, though two were of the tuck-in variety.
Focus Financial’s high IPO may cause it problems for years, one analyst predicts, comparing the company to General Motors' ill-fated Hummer H-1, an oversized, inefficient vehicle, ultimately unloved by consumers.
"Hummer executives must have been frustrated when the media lampooned their products for being ungainly and inefficient. After all, Hummer never pretended to be anything else, Mercer analyst Matthew Crow writes.
I sensed a similar frustration in [CEO] Rudy Adolf’s voice as he pleaded (Dec. 5) Focus Financial’s case at the Goldman Sachs U.S. Financial Service Conference. Ironically, Goldman Sachs was the key advisor to Focus Finacial in setting an IPO price back in July.
The article's title says it all: "Is Focus Financial an All-Terrain Investment Vehicle?" with the sub-head: "Management claims their model is recession proof; unfortunately, it isn't analyst proof." Here is a link to his full report.
"The recent share price performance of Focus clearly suggests the market is losing interest in the issue, and it doesn’t seem to have anything to do with Brexit or yield curve inversions," he wrote in the opinion, posted Dec. 10.
"Instead, the analyst community seems to have soured on the Focus story, which is strange to us, because the story hasn’t really changed since the company filed the first version of its S-1 back in May."
The first week of December was turbulent for all equities, but Crow noted Focus was particularly hard hit.
Less than five months since the IPO, Focus closed Dec. 7 at $27.45, down 44% from its all-time, post-IPO high of $49.52.
In contrast, the Nasdaq, on which it trades, is down 13% from its high. Focus is "decidedly below where the offering priced at $33, and not much more than half the share price achieved less than three months ago," Crow notes.
The stock price for the New York-based roll-up closed at $25.51 today (Dec. 20), off 8.89% from its $27.88 open. A major part of Focus's problem was its high IPO price tag, Crow said. See: Focus Financial shares soar after Rudy Adolf pumps the pipeline and stiff-arms analyst who presses him on a Focus sore point--organic growth, or lack thereof On Friday at noon (Dec. 21) the shares slipped an additional 3% to $24.75, or about 33% from day one trading of $37-plus.
"Having gone public at $33 per share on heavily adjusted earnings, Focus doesn’t have a history of profitability to form a reliable foundation for value. If Focus had IPO’d at $18 and drifted up over the first few months to the mid-20s, it would be viewed today as a success," he writes. See: Focus Financial IPO pays off for KKR and Stone Point, after all, by hitting price mark, plus an investor 'pop.' Now, on to the less glamorous task of paying down debt
"I’m not suggesting that $18 was a more appropriate valuation at IPO, but an excessive valuation at offering can be an albatross for a public company – and that may be how we eventually see this situation," he adds. See: 'Oversubscribed' Focus Financial lowers asking price as IPO-eve share demand wanes, raising prospect of a $100 million offering haircut
Focus's organic growth is a major problem, Crow says in his report. See: In another go-go sign, Focus Financial moves up IPO trade date to as early as Monday
Louis Diamond, principal of Diamond Consultants says Focus's problems are largely industry problems not unique to the firm itself.
“Most of the industry is having trouble with organic growth. I think it’s a sellers’ market for RIAs, and many are ripe for acquisitions. I don’t think Focus will run out of folks to acquire and I think they can keep their growth engine up,” he says.
Indeed, on Dec. 17, Focus announced its purchase of Altman, Greenfield & Selvaggi LLP, a family office and business management firm headquartered in New York City that has no ADV.
It also announced that Buckingham Strategic Wealth, which it owns, tucked in Alpern Wealth Management, which manages $192 million and Griffon Financial Planning, Inc., which manages $86 million. Buckingham becomes KKR-fueled, check-listed M&A 'machine' that now feeds on BAM TAMP clients
One double-edged sword for Focus is the number of firms under its umbrella. A handful could be slowing down the firm’s overall growth. “If there are some firms that aren’t performing as well, they’ll probably drag down the numbers,” Diamond says.
During its 3rd quarter financial report, Focus CEO Adolf said the company's objective was to produce "annual growth in both revenues and adjusted net income per share of 20% on average and over time.”
Crow notes that the problem is the word, "adjusted."
"Adjusted means they can grow by acquisition, but they’ll be expending cash and equity to fund that growth. Organic growth is estimated at 10%, but it includes acquisitions by partner firms. Management justifies this because broker-dealers include advisor recruiting in their organic growth rates,” he writes.
Crow adds: “That’s a risky justification, because the economics of broker-dealers has been eroding for decades, and many see the practice of paying to poach advisors as a sign of an industry in distress."
Diamond agrees that the IPO was likely overpriced in part because Focus got a huge bump for being the first IPO in the pure RIA space.
“They were able to get shareholders, founders and private equity partners maximum value and now it’s time to execute on it and keep a growing and stable company," he explains.
But Diamond, who is not an equity analyst, but is part of a recruiting firm that participates in M&A transactions, maintains the industry is not in trouble. Rather, the high IPO price was a reward for Focus's partners, he says.
But Crow disagrees saying Focus is now in a challenging, up-hill battle because of the $33 IPO price. But Analysts Buzz website wrote a column last Tuesday that the firm is likely to hit $40.33 in the 52-week period.
Another analyst Jake Williams posted a report, also Tuesday, on Reagents Global Market that Focus’s stock might be a good time to purchase it in terms of historical performance.
“Right now, FOCS stock is trading… above its 200-day moving average and may be a good opportunity to buy,” he wrote.
But Williams also noted that the firm's liquidity is poor. The company has a market cap of $1.9 billion with $69.1 million shares outstanding. Trading volume was 202,533 shares with an average volume of 281,686.
“Our calculation, using the current average volume and close price, leads me to believe that the liquidity is bad, highly speculative and an investor may want to avoid this stock,” he wrote.
Today's drop happened on better than average volume, 365,543 shares.
Of the seven analysts covering the stock, three have issued a "buy" rating and four have the stock on "hold." No one is pushing a sell rating. The average price target is $39.33.
"Nine months ago, the investment banking community wanted to see Focus as the ultimate RIA – but it was never that. Focus is a complex feat of financial engineering which demonstrates, above all, how difficult it is to build a consolidation model in the investment management community," Crow concludes.
Looking past Covid-19 pandemic, Louisiana RIA buys $1-million building after hitting $1 billion in AUM and hiring the town's mayor
Summit Financial Wealth Advisors was sold to Focus Financial in 2014, growing its assets by $400 million since then but keeping staffing about the same
December 17, 2020 – 3:02 AM
Focus Financial Partners, LLC
Top Executive: Rudy Adolf