Focus Financial shares hit new lows following Goldman Sachs presentation, analyst compares RIA stack to GM’s hapless Hummer H-1

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The roll-up’s share price closed at $ 25.51, a steep drop from the $ 37 it traded on on day one – and even below the targeted $ 33. But is it really the unsightly, inefficient and overpriced SUV or rather the promised Ferrari CEO Rudy Adolf but crushed by an unruly market?

Note from Brooke: It’s a bad time to be in action. Ask Mark Zuckerberg, Jeff Bezos or Lawrence Culp. It happens to the best of them. But Focus Financial CEO Rudy Adolf may have made an unforced error in the IPO’s price overrun that puts his company in its first months of trading in a particularly worrying position. This could end up becoming a concern for all RIA activities. Focus Financial is comparable. Of course, Focus could help its own case by doing more transactions. Mercer Advisors appears to be doing more with less. See: Lisa’s Bits: Commonwealth and Cambridge Embark on Larger RIA Guard Game But Focus reported three deals on December 17, although two were of the “tuck-in” type.

Focus Financial’s high IPO could cause it problems for years, one analyst predicts, comparing the company to General Motors’ hapless Hummer H-1, an oversized and inefficient vehicle ultimately unloved by consumers.

“Hummer executives must have been frustrated when the media laughed at their products for being unsightly and ineffective. After all, Hummer never claimed to be anything else, writes Mercer analyst Matthew Crow.

Rudy Adolf: Predicts “annual growth in income and adjusted net income per share of 20% on average and over time”.

I felt a similar frustration in [CEO] Rudy Adolf’s voice as he pleaded (December 5) the Focus Financial case at the Goldman Sachs US Financial Services Conference. Ironically, Goldman Sachs was the main advisor to Focus Finacial when setting an IPO price in July.

The title of the article says it all: “Is Focus Financial an all-terrain investment vehicle?” with the caption: “Management claims their model is recession-proof; unfortunately, this is not the evidence of analysts. Here is a link to his full report.

“Focus’s recent stock price performance clearly suggests that the market is losing interest in the issue, and it does not appear to have anything to do with Brexit or yield curve reversals,” he wrote in the published opinion. December 10.

Instead, the analyst community seems to have soured the Focus story, which is odd to us, as the story hasn’t really changed since the company filed the first version of its S. -1 in May. “

The first week of December was eventful for all stocks, but Crow noted that Focus was particularly hard hit.

Less than five months after the IPO, Focus closed on Dec. 7 at $ 27.45, down 44% from its all-time post-IPO high of $ 49.52.

The Hummer has proven to be over-designed, even for weekend warriors, not a vehicle analysts use as an optimistic metaphor.

In contrast, the Nasdaq, on which it trades, is down 13% from its high. The focus is “significantly below the offer price at $ 33, and not much more than half of the share price reached less than three months ago,” Crow notes.

The share price for the New York-based roll-up closed at $ 25.51 today (December 20), down 8.89% from its opening of $ 27.88. A significant part of Focus’s problem was its high price for the IPO, Crow said. See: Focus Financial shares soar after Rudy Adolf pumped the pipeline and the stiff-armed analyst who pushed him on a sore spot in Focus – organic growth, or lack thereof. At noon on Friday (December 21), stocks slipped an additional 3% to $ 24.75, or about 33% on the first day of trading $ 37 and above.

History lesson

“Going public at $ 33 per share on sharply adjusted earnings, Focus has no history of profitability to form a reliable basis for value. If Focus had gone public at $ 18 and drifted in the first few months to the mid-20s, that would be considered a success today, “he writes. See: Focus Financial’s IPO is profitable for KKR and Stone Point, after all, by hitting the price bar plus a “pop” investor. Now let’s move on to the less glamorous task of paying down debt

“I’m not saying $ 18 was a more appropriate valuation on the IPO, but overpricing on the offer can be an albatross for a public company – and maybe that’s how we see it. ultimately this situation, “he adds. See: Focus Financial ‘oversubscribed’ lowers asking price as demand for shares on the eve of IPO declines, raising prospect of $ 100 million cutoff offer

Louis Diamond, director of Diamond Consultants, says Focus’s issues are largely industry issues that are not unique to the company itself.

Lou Diamond
Louis Diamond: “Most of the industry has problems with organic growth. I think it’s a seller’s market for AIRs.

“Most of the industry has problems with organic growth. I think it’s a sellers market for AIRs, and many are ripe for acquisitions. I don’t think Focus will run out of people to acquire and I think they can keep their engine of growth going, ”he says.

Indeed, on December 17, Focus announced the purchase of Altman, Greenfield & Selvaggi LLP, a New York-based family business and management company that does not have an ADV.

He also announced that Buckingham Strategic Wealth, which he owns, has integrated Alpern Wealth Management, which manages $ 192 million, and Griffon Financial Planning, Inc., which manages $ 86 million. Buckingham becomes a KKR-powered M&A “machine” that now feeds on BAM TAMP customers

A double-edged sword for Focus is the number of companies under its umbrella. A handful could slow the overall growth of the business. “If there are companies that aren’t performing as well, they’ll likely drive the numbers down,” Diamond says.

In his Q3 financial report, Focus CEO Adolf said the company’s goal is to deliver “annual growth in both revenue and adjusted net income per share of 20% on average and in time”.

Crow notes that the word “adjusted” is the problem.

Industry in difficulty

“Adjusted means they can grow through acquisition, but will spend cash and equity to fund that growth. Organic growth is estimated at 10%, but it includes acquisitions by partner companies. Management justifies it because brokers include recruiting advisers in their organic growth rates, ”he writes.

Crow adds, “This is a risky justification, as the brokerage economy has been eroding for decades, and many see the practice of paying to poach advisers as a sign of a struggling industry. “

Diamond agrees that the IPO was probably too expensive in part because Focus had a huge bump in being the first IPO in the pure RIA space.

“They were able to achieve maximum value for shareholders, founders and private equity partners and now is the time to run it and keep a growing and stable business,” he explains.

But Diamond, who is not an equity analyst but is part of a recruiting firm involved in M&A deals, maintains the industry is not struggling. On the contrary, the high price of the IPO was a reward for Focus’s partners, he says.

But Crow disagrees that Focus is now in an uphill battle due to the IPO price of $ 33. But Analysts Buzz’s website wrote a column last Tuesday that said the company is expected to hit $ 40.33 in the 52-week period.

Another analyst, Jake Williams, also released a report on the global reagents market on Tuesday that said Focus stock may be the right time to buy it in terms of historical performance.

“Right now the FOCS stock is trading… above its 200 day moving average and may be a good opportunity to buy,” he wrote.

Liquidity

But Williams also noted that the company’s liquidity is low. The company has a market capitalization of $ 1.9 billion with $ 69.1 million of shares outstanding. The trading volume was 202,533 shares with an average volume of 281,686.

“Our calculation, using the current average volume and the closing price, leads me to believe that the liquidity is bad, highly speculative and that an investor may want to avoid this stock,” he wrote.

Today’s drop occurred on above-average volume, 365,543 shares.

Of the seven analysts covering the stock, three have issued a “buy” rating and four have the stock “pending”. Nobody pushes 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 never was. Focus is a complex feat of financial engineering that demonstrates, above all, how difficult it is to build a model of consolidation in investing. management community, ”concludes Crow.

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