Stifel Financial Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Stifel Financial Corp. is a diversified financial services company primarily engaged in retail brokerage, investment banking, and investment advisory services, serving individual, corporate, and institutional clients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Stifel Financial Corp. (SF) is a diversified financial services firm operating in a highly competitive and regulated industry. While they’ve carved a decent niche and display some notable advantages, their moat isn’t strong enough to warrant a rating beyond a 2 out of 5.

Business Overview

  • Revenue Distribution: Stifel’s revenue streams are quite diverse, but they are heavily influenced by market volatility and client activity. A sizable portion is generated through commissions from brokerage trading and advising. Investment banking revenue, including underwriting and M&A advisory fees, can also fluctuate due to the deal flow and market conditions. Net interest income and other income sources tend to be more predictable, driven by asset management fees and, to a lesser extent, lending income.
    • Global Wealth Management is their largest division generating 72% of net revenue in 2022 which encompasses brokerage and other investment related services.
    • Institutional Group provides services including securities trading, investment banking, and research generating 24% of net revenues.
    • Other Segment is comprised mainly of corporate items and makes up 4% of total net revenues.

  • Industry Trends: The financial services industry is undergoing considerable transformation, driven by increased regulations, technological advancements, and shifting investor preferences. The rise of fintech companies and the increasing popularity of passive investment strategies are placing additional pressures on traditional firms like Stifel. The low interest rates and economic uncertainties has had a major impact on the performance of these firms. The SEC has made changes that require the companies to disclose all of their holdings, which greatly affect the revenue structure.

  • Margins: Stifel operates with relatively high margins, primarily due to its focus on providing high-margin services such as wealth management and investment banking. However, its margins fluctuate somewhat, because of the dependency on trading income. Also, their business of buying and selling securities puts them at an increased risk of market volatility.
    • Looking at the past performance, their operating margin has been in the range of 20-30%, which is a decent margin.

  • Competitive Landscape: The financial services sector is highly competitive. Stifel competes with large investment banks, regional brokers, boutique firms, online discount brokers, and a growing number of fintech companies. Differentiation is tough, and the level of competition has been increasing. All the players in the industry, especially the bigger ones, have similar services and offerings. Stifel has tried to differ itself from the competitors by focusing more on client relationships and having a local presence, but has not been able to differentiate itself significantly.

  • Differentiation: Stifel differentiates itself from other brokers by providing strong client relationships, having a local branch presence, and having full services and an array of offerings. But none of these things is special and can easily be replicated by competitors. There is no specific technology or innovation that gives Stifel a big advantage over other financial companies.

  • Financials
    • Looking at income statement, it’s revenue has decreased considerably. For the three months ended Sept 30, 2023, the revenue was at $1.25 billion, whereas in 2022 the revenues were $1.6 billion for the same period. For the nine months, the revenue has decreased from 4.9 billion in 2022 to $3.8 billion in 2023.
    • The income has significantly decreased in the last quarter, where the net income was $114.3 million in 2023, compared to 4141.5 million in 2022.
    • Their financial strength is based on their balance sheet and operating metrics. They seem to have a decent amount of assets and limited liabilities. And that has helped them generate solid returns.
    • Looking at the ratios, the market to book is around 1.4 times, the leverage is less than 10%, and return on equity has been in the teens.
    • One thing that is worth mentioning is their liquidity, which has improved a lot in the past one year.
    • Overall, the performance of Stifel is mainly dependent on the market conditions, economic activity, and clients.

Moat Assessment

  • Intangible Assets: Stifel does benefit from its strong brand recognition and reputation, which helps acquire clients and retain talent. However, given the crowded market, this brand is not enough to protect it from rivals. The level of awareness for Stifel is also low among investors, thus, it’s not that of a strong brand.

  • Switching Costs: Although the process of transitioning from one investment firm to another is challenging, it is not insurmountable for clients with sufficient assets. Clients are also very reluctant to move their accounts and assets. The average customer holds its account at a bank for around 6 to 7 years.

  • Network Effect: The network effect for Stifel is largely insignificant. It is not similar to financial exchanges and other such businesses. The number of clients does not directly translate to more business. Thus, it can not create any meaningful moat.

  • Cost Advantages: The company does not seem to have unique cost advantages, because of the nature of the business which is mostly providing services. Operating costs vary depending on number of services and scale, but they don’t have any structural cost advantage that the competitors do not.

In summary, while Stifel has a stable and decent business, it lacks significant differentiating characteristics that can provide it a sustained advantage. Due to increasing competition and low client switching costs, the returns on capital could go down.

Risks to the Moat & Business

  • Market Volatility: Stifel is highly exposed to market fluctuations. As markets decline, the company can face a sharp fall in trading revenue. This effect can be seen in the last reports, with revenues falling significantly.
  • Regulatory Changes: The financial industry is heavily regulated and any major changes can significantly alter Stifel’s business model. As the industry is under heavy scrutiny from government and SEC, new regulations and actions from the SEC can change the dynamics for the worse.
  • Competition: The competition is immense, and is expected to rise in the coming years. New players and new technologies are making it difficult for the company to achieve sustainable margins.
  • Macroeconomic factors: Any changes in macroeconomic conditions are very impactful for financial firms. Increased recession risk, inflation, or interest rate changes would have a large impact on Stifel’s business.
  • Acquisition Risk: Stifel has followed the strategy of acquiring several businesses in the past couple of years, and the company is at high risk of not managing to generate value from those acquisitions. Synergies are not easily created, and integration costs can be high.

Business Resilience

  • Diversified Revenue Streams: Stifel’s diverse revenue sources provide some resilience against fluctuations in one particular area.
  • Client Relationships: Stifel is known for its high quality service and building strong client relationships, that will help it be resilient.
  • Strong Financial Position: Stifel has a good capital base and decent liquidity. This will help the firm sustain itself in difficult times.
  • History of navigating industry cycles: The company has a long history of navigating industry cycles, that is helpful in uncertain times.
  • Management experience: They have a highly experienced management that can navigate turbulent times better.

Despite all the advantages that the company possesses, the risks to the moat and the business should be given due importance.

Understandability Rating: 3 / 5

The business model of Stifel is reasonably straightforward, encompassing retail brokerage, investment banking, and wealth management. It earns through transaction fees, commissions, and management fees. However, its financial statements and the underlying accounting complexity are intricate, making it difficult for a non-expert to fully comprehend. Also, the impact of market cycles and its impact on revenues and expenses is difficult to project.

Balance Sheet Health Rating: 4 / 5

Stifel displays a stable and relatively healthy balance sheet. It has a high ratio of assets to liabilities and a good liquidity. Also, the company has maintained a low debt/equity ratio and has consistently grown its book value. However, it still is susceptible to market volatility and external economic risks.