The shares are up more than 30% since Aug. 20; the CEO boasted on the quarterly call that the IPO itself sent the M&A pipeline spiraling higher

September 6, 2018 — 12:33 AM UTC by Brooke Southall

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Brooke's Note: Once the prepared remarks by Focus CEO Rudy Adolf and his CFO, Jim Shanahan, were completed, Wall Street analysts took less than five minutes to back the two executives into a corner where they had a choice -- flight or fight. There was no fight. Asked for the truth on how much of the organic growth was really organic leading up to June 30, Rudy spoke sideways then passed off the question to Shanahan who promptly broke the news that analysts will need to play a guesing game on this one statistic that means more, long term, than any other. But Adolf knows that Wall Street also has an acute interest in the short term. On that topic he was bold and let it be known that inorganic growth has room to run and run. So, surprise, shares soared.

Focus Financial Partners shares soared today to near $50, smashing through analysts' targets before settling back to $47.71 at the close, despite CEO Rudy Adolf's stonewalling of analysts last week who sought key data points revealing the firm's growth from "organic sources." 

Jamie McLaughlin
Jamie McLaughlin: Based on today's price, it's been a colossal success, but it's still early.

"Several analysts (BMO Capital Markets, Goldman Sachs, Bank of America, William Blair) have initiated coverage on FOCS, most with a price target around $42 per share," says Matthew Crow, president of Mercer Capital of Memphis, Tenn. in an email.  "On the one hand, that’s damning them with faint praise, but it is also solidly above the IPO price." 'Oversubscribed' Focus Financial lowers asking price as IPO-eve share demand wanes, raising prospect of a $100 million offering haircut

The move came as the Nasdaq, on which Focus trades under the symbol FOCS, closed down 96 points (1.19%) to 7,995.17. The narrower Russell 2000 index of tech stocks fell 5.73 points, or 0.33% to 1,727.75.  The Dow Jones Industrials average posted a slight gain.

The shares of the New York-based roll-up of 60 RIA firms hit a new 52-week high of $49.49 in intra-day trading, before falling back to $47.71 at the close. But it's still showing strength in after hours trading, where, at last check, it was trading at $47.80. 

Shares are now 44.6% higher than the stock's $33 initial offering bid set went it went public in late July. It also blew past analyst projections. The investors that Fidelity got aboard are pleased as its spokeswoman suggested they might be. Focus Financial conscripts Fidelity to bombard RIA principal/prospective clients with IPO solicitations while one research shop waves a yellow flag

Just over two weeks ago , Raymond James analyst Patrick O'Shaughnessy initiated coverage of Focus Financial with an Outperform rating and $43 price target.

The IPO itself has been a real success, according to Jamie McLaughlin, principal of J. H. McLaughlin & Co. LLC of Darien, Conn.

"Yes, based on today’s price (up almost 5% on Wednesday alone), it’s been a colossal success, but it’s still early," he says.  "Give them a lot of credit; they apparently executed a fine road show, successfully subscribed the IPO, and are now entering an analysis phase, where, after an initial analysts’ calls, the market is responding positively to what appears to be solid earnings."

Passing grade

The company reported a $7.7 million net income loss but adjusted earnings of $29 million, a 37.6% jump on revenues that jumped by 47.2%.

Credit Focus for passing its first exam as a public company, Crow adds.

"The first earnings release went smoothly.  Some newly public companies stumble badly on their first earnings release, and it’s hard to recover from that.  I suspect some investors were at least relieved after the call – and I’m sure management was!"

But though the call went "smoothly" enough, it wasn't without tension between the analysts and Focus executives. After Focus boasted that its organic growth soared to 16.7% for the three months ended June 30, an analyst asked Focus Financial CEO Adolf what portion of that growth was actually from the inorganic growth of partners -- i.e. sub-acquisitions.

After Adolf rambled on the topic of a particularly satisfying sub-acquisition, the analyst restated his question.


Focus Financial by the Numbers

Revenue growth of 47% driven by robust organic performance and new partner firm additions

  • Total revenues of $231.4 million, an increase of 47.2%
  • Net loss of $7.7 million
  • Adjusted Net Income* of $29.0 million, an increase of 37.6%
  • Adjusted Net Income Per Share* of $0.40, an increase of 37.6%

Adolf referred the pointed question to his chief financial officer, Jim Shanahan, who said Focus does not break out organic growth between acquisitions and the net new assets added by existing RIAs.

The brush-off goes to the root of RIA anxiety industrywide, McLaughlin says.

"With last year an exception, RIAs have been notoriously poor organic growers per Fidelity’s benchmarking study," he says.  "It’s really their Achilles heel versus the wirehouses.

"One question I’d ask them is what portion of each deal did they pay in cash vs. earn-out?  Of the earn out, how much of the earn out was realized by the seller?  My bet it was around 50%.  What is Focus doing to remedy their tepid organic growth; what are they doing to prepare their affiliates for a down market?"

Crow agrees that the question of organic growth remains a sore point.  "I don’t think management has yet addressed the organic growth question adequately," he says.

But Adolf was plenty vociferous about his company's prospects for increased inorganic growth.

"We have probably [got] the most robust pipeline I have ever seen," he said on the quarterly call on Aug. 29 in response to an analyst's question.

Healthy pipelines

Adolf went on to explain that a healthy pipeline became much more so after the IPO because of the signal it sent to the marketplace of RIAs considering a sale of their firms. He added that the sub-acquisition pipeline is every bit as full as the one the holding company enjoys.

"An IPO is good for publicity, so Focus is attracting more attention from RIAs that are seeking a liquidity event," Crow agrees.  "It puts a LOT of pressure on Hightower and the other RIA aggregators. [The IPO] positions Focus as a market leader in the consolidator sub-segment."

In answer to an analyst's question about operating leverage and competing roll-ups, Adolf dismissed competitors.

"We have a very much more sophisticated model," he said with regard to how Focus holds RIAs without actually taking title to them. He added that roll-ups that integrate RIAs into one big firm on a single ADV are in an uphill battle "hoping to squeeze out synergies."

McGlaughlin agrees that a company dependent on M&A for growth is vulnerable.

 "This is what they know how to do, and it has value," he says. "But is it simply a financial transaction (i.e. an asset play) or a strategic transaction that can strip out redundant expenses and may add other intrinsic value, like service capability, geographic/location for the Focus brand and which can create good will? 

"There has to be more, or the deal-making is like a drug you need to keep taking.  What happens when the pipeline runs dry or the deals become too rich?"

Adolf, for his part, is focused on the present. His company's ability to fund purchases is backed by "tremendous firepower," he maintains. 

"We believe we are in the right industry, in the right model at the right time." He later added: "We are just in a really good spot. We like what we see."



Mentioned in this article:

Focus Financial Partners, LLC
Consolidator/Roll-up Firm
Top Executive: Rudy Adolf

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Jeff Spears said:

September 6, 2018 — 11:43 AM UTC

My take on the Focus EPS call was that Rudy's audience was RIAs not public shareholders. Rudy has the recruiting pitch down and he reverted to that comfort zone on the call. My guess is that inorganic growth will continue to drive the bus.

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