Analysts and investors point to Stifel’s 2005 acquisition of Legg Mason Inc.’s capital-markets business from New York- based Citigroup as the deal that bolstered the firm’s institutional business. Other deals include its purchase of Thomas Weisel Partners Group Inc. in 2010 to add health-care and technology banking.
Plate Full
“Because they stuck to their knitting through the years, they were able to emerge from the financial crisis in an offensive position where a lot of their competitors, larger and smaller, were playing defense,” said Devin Ryan, an analyst at Sandler O’Neill & Partners LP.
In 2011, Stifel had net income of $84.1 million. For 2012, that figure is expected to jump to $138.3 million, according to the average estimate of three analysts surveyed by Bloomberg. Stifel has posted record net revenue every year since Kruszewski took over as CEO. Analysts estimate revenue to reach $1.61 billion in 2012, a 14 percent increase from 2011.
Stifel’s global wealth-management group had $908.2 million in revenue in 2011, and the institutional division had $507.4 million.
While the global wealth-management unit has room to grow, “our plate is pretty full” on the institutional side, Kruszewski said.
Tangible Book
Stifel’s trading floor carpeting is a patchwork of patterns, expanded in pieces as the company adds desks and employees. On a recent Monday afternoon, the floor was as quiet as an insurance office. No one was standing and yelling. Bells weren’t ringing. A few traders turned around to say “Hey, Ron,” as Kruszewski walked by.
Last year, Stifel agreed to buy KBW Inc., an investment bank focused on the financial services industry, in a transaction valued at $575 million. The deal, which pays KBW shareholders $17.50 in cash and stock, gives the New York-based firm a valuation that is 7.4 percent higher than its closing price on Nov. 2, the last trading day before the deal was announced.
Stifel investors such as Randy Loving of Silvant Capital Management LLC say they’re concerned the firm overpaid. KBW’s shares already were trading at 1.3 times tangible book value --a measure of how much a firm would theoretically be worth in liquidation -- when the deal was announced, according to data compiled by Bloomberg.
Deal Volume
“I don’t think they needed to pay the amount of money that they paid,” said Loving, a sector portfolio manager for Atlanta-based Silvant whose team oversees $3 billion. KBW was “shutting down parts of the business, and had that continued, I think it’s possible that Stifel could’ve picked up whatever expertise they needed somewhat cheap,” he said.
Moreover, adding sales-and-trading and investment-banking businesses increases earnings risk and volatility, Loving said. It also makes Stifel more dependent on an upturn in banking volume, something Loving said he’s not convinced will happen.
“When you think about Stifel as a stock, it actually did OK during the downturn because it was devoid of all these issues,” he said.
After reaching a March 2011 closing high of $49.60, Stifel closed at $36.85 yesterday, down 26 percent from its peak. Still, the firm’s shares have outperformed those of the biggest banks since the financial crisis. Goldman Sachs Group Inc. has declined 32 percent since the end of 2007 and Morgan Stanley has plunged 57 percent. Stifel has gained more than 50 percent in that period.
‘Advice Driven’
With global deal volume about half of what it was in 2007, it may be too early to judge many of Stifel’s acquisitions, said Errol Rudman, portfolio manager at Rudman Capital Management in New York. The KBW deal, in addition to other institutional purchases, positions the firm to take advantage of an upswing in investment-banking activity, he said.
“They expanded at a time when others were contracting, and secondly, they’ve paid prices that reflected the failed businesses they were buying,” Rudman said. “When and if the time changes, they’ll be leveraged to that concept of being larger and having purchased the assets at a cheap price.”
Kruszewski’s goal is to build Stifel into a “bigger version of what we are today” by adding employees and letting the balance sheet grow along with it.
