Stifel's Growing Pains
Call it the Kirk Cameron bank, because Stifel Financial is suffering from some serious growing pains.
Its shares plunged as much as 11 percent on Wednesday, extending their retreat from a record high last June to as much as 58 percent, after the St. Louis-based firm reported earnings that missed analysts' estimates late Tuesday. (For those who get a chuckle out of such things, it's roughly a 36 percent slide since Goldman Sachs upgraded the shares to "buy" in January.)
The plunge is focusing scrutiny on Chief Executive Officer Ronald Kruszewski's long-term strategy to grow through acquisitions. To be fair, that strategy had been working like a charm for shareholders for a long time. The stock jumped from less than $4 when he took over in 1997 to a peak of almost $60 last June as the company made more than two dozen takeovers. However, the slide since then has been worse than it was during the financial crisis.
The latest acquisitions include rival brokerage Sterne Agee, the U.S. wealth-management business of Barclays and fund-placement specialist Eaton Partners. The takeovers helped push the firm's asset above what Kruszewski calls the "line in the sand" of $10 billion, which is the size at which the Federal Reserve requires firms to conduct stress tests under Dodd-Frank rules. And those don't come cheap, adding a lot of expense to the firm's fourth quarter.
"I don't think it's any secret that the DFAST requirements are very expensive," Kruszewski told analysts on a conference call on Tuesday, using the acronym for Dodd-Frank Act stress tests. "We took them very seriously, because, frankly, to not comply would eviscerate our entire strategy of how we grow. "
Those aren't the only growing pains. Kruszewski also likes to compensate employees from acquired businesses who stick around after the merger, usually by paying them in stock. Merger expenses like that make reconciling Stifel's GAAP earnings to operating results a little tricky. Stifel put its core earnings per share at 51 cents. Credit Suisse analyst Christian Bolu, who downgraded the stock to "underperform" before the earnings release, said it was closer to 45 cents. The average estimate compiled by Bloomberg called for 67 cents.
Either way, it was a big miss. And like bigger rivals who reported results before Stifel, much of the problem was out of its control. Turbulent markets in the second half of 2015 threw capital markets into disarray. They don't show much sign of improving this quarter. At Stifel, institutional equity brokerage revenue declined 19 percent. Investment banking revenue was down 40 percent as equity capital raising decreased 15 percent and advisory revenues decreased 68 percent, offsetting growth in fixed income after the Sterne Agee acquisition.
"The reality sometimes of what's going on versus the market's perception is completely different," Kruszewski said. "This is one of those times."
That very well could be true, but how long that disconnect between perception and reality lingers is the question. And Stifel's acquisitive nature, with the new talent brought onboard, may make cutting costs to improve margins more difficult than at larger banks.
So what's the strategy? Keep growing assets to justify the build-out of the infrastructure. Kruszewski wants to increase assets to $15 billion by the summer. What kind of assets is he targeting? "Kind of know it when you see it," he told analysts.
To stretch the growing pains analogy to the point of annoyance, Stifel was like a kid who lined up lots of dance partners at the prom. But then the music stopped. Now, like most investment banks, it really needs the DJ to start spinning tunes again. When will that be? You'll know it when you see it.
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