Why This Investment Bank’s Stock Price is Surging

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The past couple of years have not been great for investment banks, given the high-interest-rate environment. However, middle-market investment bank Stifel Financial (NYSE:SF) turned in a pretty good fourth quarter, and its stock was one of the biggest gainers on Wednesday.

Stifel shares were up by about 5% on Wednesday to nearly $74 per share after the company beat earnings estimates. While its investment banking revenue was down, Stifel got a lift from its wealth-management business.

Diversified model boosts Q4 results

The St. Louis-based firm saw its revenue tick up 3% year over year in the quarter to $1.15 billion, while its net income fell 8% to $153 million, or $1.38 per share. Both revenue and earnings results topped analysts’ estimates.

While its investment banking revenue was down 8% to $201 million, Stifel did receive a boost from its global wealth-management arm. The firm recorded a 3% year-over-year revenue increase to $766 million in the quarter, led by a 14% surge in asset management revenue that was spurred on by higher asset levels, which rose 14% to $443 billion. 

Stifel Chairman and CEO Ronald Kruszewski cited the company’s diversified business model as the key to navigating a less-than-ideal operating environment.

“Given our position as a premier wealth management firm and middle-market investment bank, as well as the increased scale of our business, we see significant opportunities for top and bottom-line growth as market conditions improve,” he said.

For the full year, Stifel’s revenue fell 10% to $4.35 billion. However, the wealth-management business saw an 8% revenue increase for the year to $3 billion, which is a record for the firm. Stifel added 40 financial advisors with a 28% increase in recruited advisors. Meanwhile, the institutional group, which includes investment banking, saw its revenue drop 20% for the year to $1.2 billion.

Investment banking revenue should increase in 2024

Stifel should see better results from investment banking in 2024 as conditions are expected to improve. In its outlook, the firm said the consensus calls for a 25% increase in investment banking revenue for the year, while asset management revenue is estimated to increase 12% in 2024.

Stifel’s own guidance calls for $3.55 billion to $3.8 billion in net operating revenue in fiscal 2024, up from $3.2 billion in 2023, while its net revenue is targeted to be between $4.55 billion and $4.9 billion, up from $4.3 billion last year. Further, Stifel expects the compensation ratio to be 56% to 58% this year, on par with or potentially lower than the 58% ratio in 2023.

Last year, Stifel stock was up 21% for the year, and over the past 10 years, it has posted an average annualized return of 8.3% as of Jan. 23. Analysts expect minimal growth for Stifel this year, with a consensus price target of about $76 per share, which is just a few percentage points higher than it is now. With Wednesday’s gain, Stifel’s stock price is up by about 7% year to date.

With a reasonable valuation of about 16 times earnings and an expectation for increased revenue, I think Stifel shares could run a bit higher than the consensus price target. Investors will also benefit from a 17% increase in the dividend this quarter to 42 cents per share.

Stifel probably won’t shoot the lights out, but in an improving environment, its strength in wealth management and investment banking make it a solid option for some investors.