Raymond James: On Solid Ground

The credit crunch and the Bear Stearns bailout have given all brokerages a black eye. The cloud of investor doubt unfairly hangs over at least one firm, Raymond James Financial.

So far, financial firms, including banks, brokers, investment banks and mortgage lenders have written down more than $150 billion in asset-backed securities because of the subprime mortgage mess. The roster includes such big names as Lehman Brothers, Merrill Lynch and Morgan Stanley. But, so far at least, Raymond James (symbol RJF) has not marked down a penny of its assets.

The St. Petersburg, Fla., firm published detailed statistics of its lending activities on March 26. Regarding the $3.5 billion in corporate loans on Raymond James' balance sheet as of December 31, more than half of the borrowers are publicly traded companies, and nearly two-thirds of those companies generate operating income of at least $50 million a year.

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The company's residential loan portfolio is not too shabby, either. It's true that more than 75% of the firm's $2.2 billion worth of residential loans charge only interest initially, for periods of three to five years. But Raymond James's borrowers have decent credit, with average FICO scores of 747 (a score of more than 760 is considered excellent). Raymond James says the vast majority of the loans are fully documented.

The credit quality of Raymond James residential borrowers is reflected in the percentage of loans that bankers call "non-performing." That means the loans are 90 days or more past due. Raymond James had only 0.11% of its loans fit that category as of December 31. Compare that with 2.90% for Countrywide Financial, 2.07% for Citigroup and 2.17% for Washington Mutual in the same period.

Profits from bank loans to both residential and commercial borrowers are a small part of Raymond James' overall business. The company generated $247 million in net income in the 2007 calendar year, but only $27 million, or 11%, came from the bank loans.

As for its investing operations, Raymond James relies less on volatile commission revenue and more on fees generated by the $35.5 billion in client assets that the firm's subsidiaries manage. Fee-based revenue is more stable because it's less affected by market conditions than commissions.

Fees accounted for 59% of the company's $2.6 billion in net revenue for the fiscal year that ended September 30, compared with 41% from commissions and other one-time transactions. Five year ago, 60% of the company's revenue came from commissions and one-time transactions.

The Federal Reserve Board's unprecedented move to allow brokers to borrow from its discount window improves the outlook for Raymond James. "The combination of aggressive liquidity management by brokers, better than expected earnings, and most importantly, favorable monetary action by the Federal Reserve have eliminated a reasonable portion of the risk fears in the market," Wachovia analyst Douglas Sipkin says.

Insiders are scooping up shares. Thirteen company officers and three directors have bought Raymond James stock since January 1. It's usually a positive sign when officers and directors, who know more about a company than outsiders, start buying shares in droves. Moreover, the company on March 11 authorized a $75 million buyback of its stock.

The shares look relatively inexpensive. At their April close of $24.07, they trade for 12 times the $1.95 per share that analysts expect the company to earn in the current fiscal year. The average brokerage stock sells at 15 times earnings. The stock is 36% off its October 31 high of $37.60.

"On the small and midcap side, Raymond James is our favorite name," Sipkin says. He rates the stock "outperform" and says it is worth between $29 and $31.