Oppenheimer Stock: Record EPS & 4x P/E Plus Rising Dividends (NYSE:OPY)

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3.8x P/E, 0.9x P/B, 3% Div Yield, 14% FCF Yield

Oppenheimer Holdings (OPY), a legacy brand name, is a mid-tier investment bank and full-service investment firm. The company offers investment banking, asset management and private client services. Oppenheimer has reported sharp growth in the last five years with 2020 and YTD 2021 showing significant acceleration. Growth and focus on areas like technology and healthcare in investment banking make Oppenheimer’s stock attractive. This, coupled with increasing regular dividends, the potential for special dividends, stock repurchases, and return to positive free cash flow makes us believe that the stock offers investors with upside potential. Oppenheimer’s stock trades at a low single digit P/E despite the record financials it has reported YTD 2021.

We value Oppenheimer Class A stock at a P/E of 5.0x on 2022 estimates. This P/E is 22% below the company’s 3-year average of 6.4x. At this P/E we arrive at a target price of $65, a 40% upside from where the stock is currently trading. Currently there is no Wall Street analyst coverage or estimates for this company; it remains underfollowed and undervalued, in our opinion. We believe this provides an opportunity for our SA followers.

Very Cheap Valuations

Oppenheimer’s stock is trading at a low single digit P/E of 3.8x on 2021 estimates [nine months completed] despite the sharp growth the company has demonstrated. This we believe is extraordinarily low given the company’s track record and 3-year average P/E of 6.4x. On our estimates we expect 2022 and 2023 P/E of 3.6x and 4.2x respectively. In addition to this, the stock trades at a P/B of 0.9x. For 2022 and 2023 we forecast a P/B of 0.8x and 0.7x respectively. Oppenheimer trades at a dividend yield and FCF yield of 3.3% and 13.8% respectively on our 2021 estimates.

Dividend Increases

Management has been increasing dividends since 2018. In 2018, dividend per share was $0.44 which has grown significantly to $1.48 per share in 2020. For 2020, the dividend includes the regular dividend as well as a $1.00/share special dividend. YTD 2021, Oppenheimer has announced regular dividend of $0.39/share [$0.36 per share in 9M20]. In addition to this, in December the company announced a special dividend per share of $1.00. Annualizing the 9M21 regular dividend and adding the special dividend gets us to an estimated dividend per share of $1.52, a yield of 3.3%. Looking ahead, we see the potential for further dividend raises and the possibility of special dividends continuing.

Free Cash Flow Yield To Improve

The company has reported some variation in free cash flows from 2018 – 2020. Whereas the company reported a positive yield for 2018 and 2019 of 44.5% and 18.2% respectively, free cash flows turned negative in 2020 despite strong earnings growth. This was largely because of higher working capital requirements. Looking to 2021, with working capital requirements trending lower as demonstrated in the 9M21 earnings, we think the company is well on track to return to positive free cash flow. In our model, we estimate 2021 and 2022 free cash flow yield at 13.8% and 14.6% respectively.

Record Earnings In The Last Year

The last three years have been very strong years for Oppenheimer. While the company has been demonstrating EPS growth since 2017, EPS has exponentially grown since 2019. In 2019, the company close to doubled EPS YoY while 2020 saw a 143% YoY jump. YTD 2021 has also seen record earnings with EPS already at $7.10, an increase of 128% YoY. For the full year 2021, we estimate EPS of $12.73. In the last five years, EPS has shown a CAGR of 131.5%, while revenue CAGR has been 5.2%. ROE’s have also expanded sharply from 4.4% in 2017 to 19.2% in 2020. Oppenheimer’s capital markets division has been one of the drivers of this improved performance for 2020 and 2021. Capital markets 2020 revenue was up 46.7% and 9M21 revenues have shown a growth of 55.9%. With a focus on the technology industry for investment banking and higher AUMs in the asset management division, we believe Oppenheimer is well poised to continue demonstrating profit growth.

Oppenheimer

Investor Presentation

Oppenheimer segment revenue breakdown

Investor Presentation

Margins Have Improved

Consolidated EBITDA margins for Oppenheimer have improved sharply over the last few years, contributing to the robust EPS growth the company has been reporting. From 5.7% in 2017 to 16.5% in 2020 and 18.7% in 9M21. Lower legal, regulatory, and travel expenses helped improve EBITDA. Oppenheimer reported pre-tax income for its business segments and looking at this demonstrates that in 2020 the capital markets business saw a significant jump in profitability – moving from a loss of $13.7mn to a profit of $83.4mn. Additionally, asset management pre-tax income in 2020 was up 127% YoY. On the other hand, the private client pre-tax income fell 25.1% YoY. Overall, pre-tax margins for Oppenheimer have improved from 2.1% in 2017 to 14.1% in 2020.

Oppenheimer consolidated adjusted EBTIDA

Investor Presentation

Share Repurchases

Oppenheimer’s management has been undertaking share buybacks in recent years. In May 2020, the company announced a share buyback program to purchase 0.5mn of Class A stock, amounting to 4.2% of Class A shares outstanding. This was in addition to the existing 0.1mn shares that were still authorized for purchase under an earlier plan. In 2020 alone, Oppenheimer repurchased shares worth $15mn while in 2019 this number stood at $8.4mn. For 9M21, stock buybacks worth $4.7mn was completed. The company’s 2020 10K mentions that the share buyback program is expected to continue indefinitely. In our opinion, this is very positive and signals management’s intention to return cash to shareholders.

Mid-Tier Investment Bank

Oppenheimer Holding is a middle market investment bank. Its investment banking business is housed in the company’s capital markets division and includes investment banking, institutional equities and fixed income segments. The company focuses on sectors like technology, healthcare, financials, consumer, energy, rental services and transport and logistics. While investment banking and capital market activities are undoubtedly cyclical and inherently unpredictable quarter-to-quarter, we nonetheless believe Oppenheimer specializes in industry verticals which are growing on a secular basis. Over the last quarter, several transactions Oppenheimer has completed have been in the technology, healthcare and financial services space. While investment banking transactions and revenues are cyclical, we believe the technology space can continue seeing corporate actions in the near future. Oppenheimer is well placed to benefit from this given its focus on this industry. Over the last 5 years, Oppenheimer’s capital markets revenues have grown from $232mn to $460mn in YTD 2021. Within capital market institutional equities comprises 43.6% of sales, investment banking 31.9% and fixed income at 24.5%. The company’s investment banking arm in particular had a stellar 2020 with market share increasing.

Oppenheimer Capital markets

Investor Presentation

Oppenheimer 3Q-21 investment banking transactions

Investor Presentation

Private Client Division

The private client division offers a range of financial services to high-net-worth individuals, and businesses that include brokerage accounts and investment advisory accounts. The company has 1,003 financial advisors and 92 offices in the US. Total assets under administration for this segment are $117.8bn as of end September 2021. Assets under administration have been growing over the last few years from $86.9bn in 2017 to the current $117.8bn. While financials for the private client business remained relatively flat in 2020 with revenues declining 1.7% YoY, 9M21 has shown better performance with sales up 15.9% YoY. Overall, the private client division contributes 47.8% to total revenues at Oppenheimer [for 9M21].

Asset Management AUM Is Growing

The company offers investment management solutions as part of its asset management business. Their services are geared towards high-net-worth individuals, institutions, and corporates, and includes proprietary and third-party investment management capabilities. As at end December 2020, Oppenheimer had $38.8bn of AUM in fee-based programs. Asset management AUM for the company has been growing well. From $32.1bn in 2019, it has touched $43.6bn in 9M21. The $43.6bn includes a $1.4bn YoY net contribution of assets. The asset management business had a very strong year in 2020 with revenues up 46.8% YoY driven by higher advisory fees on a larger AUM and more incentive fee from alternative investments. This drove a 126.6% YoY jump in pre-tax income. Good performance continued in 9M21 too with asset management revenues up by 33.5% YoY and net income growing 74% YoY. We expect the acceleration in AUM to drive growth for this segment in the near future. Asset management revenues are 7.5% of total company sales while pre-tax income is 11.8% of total [for 9M21].

Oppenheimer wealth management

Investor Presentation

Dual Class Stock

Oppenheimer has a dual class stock structure with Class A and Class B shares. Of this, Class A shares have no voting rights while Class B is the voting stock. About 98% of the class B shares are held by an entity that is controlled by Mr. Albert Lowenthal, Oppenheimer’s Chairman and CEO. This means that Mr. Lowenthal essentially has control on all company related matters that require shareholder approval. This can be a risk factor, but that doesn’t mean the business is not a good investment. Many companies have two classes of shares, such as Warren Buffett’s Berkshire Hathaway, which is one of the best performers of all-time. All these stocks may still be great investments. The number of Class A shares stands at 12.4mn or 99.2% of the composite shares outstanding [including both classes]. Class B shares are 0.1mn or 0.8% of the composite shares outstanding. We do believe management is operating the firm in a favorable manner for the benefit of all shareholders. Our Seeking Alpha recommendations of Ingles Supermarkets [IMKTA] and Movado [MOV], both with dual classes of stocks, have done exceedingly well [Ingles is up 124%; Movado is up 63%].

Takeover Possibility

Oppenheimer Holdings has a good franchise in the financial services space with offerings that include a mid-tier investment bank and wealth management services. With a solid set of earnings, and an identifiable name in the space, we think the company could be a takeover target. With the Class B voting shares consolidated in the hands of Mr. Lowenthal, the company’s Chairman and CEO, the offer would have to be very attractive, and nobody will be able to acquire the company cheaply. This is positive for common stockholders as it would mean that in the event of a takeover of the company, they are likely to get good value for their shares.

Considering M&A Opportunities

In its 2020 10K, the company had highlighted that they are looking at M&A opportunities to build or acquire closely related businesses where some of their competitors have shown success. Over the long-term, management will look to pursue growth through acquisitions that match Oppenheimer in terms of corporate goals and personnel and where shareholders can get incremental value.

Debt To Adjusted EBITDA Has Come Down Substantially

Long-term debt to adjusted EBITDA has been showing a steep downward trajectory for the company. Standing at 3.8x in 2017, the number is now at 0.5x for 9M21. This reflects the significant jump in EBITDA the company has been reporting over the last couple of years. In addition, interest coverage ratio has also increased drastically – from 3.9x in 2017 to 39.5x in 9M21. This we believe gives the company enough room to pursue its M&A strategy.

Oppenheimer LT debt to consolidated EBITDA

Investor Presentation

Oppenheimer capital structure

Investor Presentation

Price Target

We value Oppenheimer Holdings Class A stock on 5.0x P/E on our 2022 EPS. Our target P/E multiple is 22% lower in comparison to the company’s five-year average P/E of 6.4x. With this, our target price for Oppenheimer Holdings is $65, which implies an upside of 40% from current levels.

Catalysts

Dividend increases

Management has been increasing dividends since 2018. In 2018, dividend per share was $0.44 which has grown significantly to $1.48 per share in 2020 [including special dividend]. YTD 2021, Oppenheimer has announced a regular dividend of $0.39/share and a special dividend $1.00/share. We estimate a full year 2021 dividend yield of 3.3%. Looking ahead, we see the potential for further dividend raises and the possibility of special dividends continuing.

Free cash flow yield to improve

The company has reported some variation in free cash flows from 2018 – 2020. Where the company reported a positive yield for 2018 and 2019 of 44.5% and 18.2% respectively, free cash flows turned negative in 2020 despite strong earnings growth. Looking to 2021, with working capital requirements trending lower as demonstrated in the 9M21 earnings, and record earnings, we think the company is well on track to return to positive free cash flow. In our model, we estimate a 2021 and 2022 free cash flow yield of 13.8% and 14.6%, respectively.

Record earnings in the last year

The last three years have been very strong years for Oppenheimer. While the company has been demonstrating EPS growth since 2017, EPS has exponentially grown since 2019. In 2019, the company nearly doubled EPS YoY while 2020 saw a 143% YoY jump. YTD 2021 has also seen record earnings with EPS already at $7.10, an increase of 128% YoY. For the full year 2021, we estimate EPS of $12.73. With a focus on the technology industry for investment banking and higher AUMs in the asset management division, we believe Oppenheimer is well poised to continue demonstrating profit growth.

Share repurchases

Oppenheimer’s management has been undertaking share buybacks in recent years. In 2020 alone, Oppenheimer repurchased shares worth $15mn while in 2019 this number stood at $8.4mn. For 9M21, stock buybacks worth $4.7mn was completed. The company’s 2020 10K mentions that the share buyback program is expected to continue indefinitely. In our opinion, this is very positive and signals management’s intention to return cash to shareholders.

Risks

Economic recession in the US

A recession in the US can lead to lower revenues for all three of Oppenheimer’s businesses. This will impact financial performance negatively.

Lower asset management fee

A compression of fees in the asset management segment can impact profitability for Oppenheimer Holdings.

Two tier stock structure

Oppenheimer Holdings has two classes of shares – A and B. Class A shares do not have any voting rights while Class B shares do. A majority of the company’s Class B shares are held by Mr. Lowenthal the Chairman and CEO. This means that Mr. Lowenthal essentially has control on all company related matters that require shareholder approval. This can be a risk for common stockholders.

Loss of key personnel

Oppenheimer depends significantly on its experienced team of professionals who have specialized expertise in their areas. Departures of key personnel can impact performance for the company’s business segments.

Competition

Competition from other financial service companies and investment banks remains high and is a key risk for Oppenheimer.

Cut in dividends

Oppenheimer has been increasing dividends over the last couple of years and has paid out special dividends in 2020 and 2021. Any reduction in the dividend per share could negatively impact the company’s stock price.

Conclusion

Oppenheimer Holdings, a legacy brand name, is a mid-tier investment bank and full-service investment firm which offers investment banking, asset management and private client services. The company has reported sharp growth in the last five years with 2020 and YTD 2021 showing significant acceleration. Growth and focus on areas like technology and healthcare in investment banking make Oppenheimer’s stock attractive. This, coupled with increasing regular dividends, the potential for special dividends, stock repurchases, and return to positive free cash flow makes us believe that the stock offers investors with upside potential. Oppenheimer’s stock trades at a low single digit P/E despite the record financials it has reported YTD 2021.

We value Oppenheimer Class A stock at a P/E of 5.0x on 2022 estimates. At this P/E we arrive at a target price of $65, a 40% upside from where the stock is currently trading.

https://seekingalpha.com/article/4480159-oppenheimer-record-eps-rising-dividends-legacy-brand

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