B. Riley Financial: Capital Markets Activities Driving Long-Term Revenue Growth (NASDAQ: RILY)

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B. Riley Financial, Inc. (NASDAQ:RILY) is a fast-growing financial services platform. Over the next five years, the company’s revenue is expected to grow at a high single-digit CAGR through its investment banking and wealth management services. I expect to the current macroeconomic weakness in terms of inflation will be correct in a few years, which will lead to increased activity in the long-term capital markets. This will propel RILY’s revenue growth at an attractive pace (at a CAGR of 9% over the next five years). Investors focused on long-term growth can buy RILY shares around the current price to maximize their gain.

B. Riley Financial is a diversified financial services company. The company invests in companies or assets that offer attractive risk-adjusted returns for the benefit of its shareholders. The company provides financial services to its clients in the areas of investment banking, corporate finance research, trading and advisory, and wealth management.

Growth engines

Capital Markets

RILY’s primary growth driver is its capital markets business. This activity includes investment banking, corporate finance, financial advisory, market research and trading services. The company offers more specialized personalized services to its customers compared to its competing companies. For this reason, the company performs well in a competitive environment. RILY’s investment banking business is primarily driving revenue growth from its capital markets business. However, the current macroeconomic weakness acts as a short-term headwind for the firm’s investment banking business. I believe now is the time to buy RILY stock for future gain. The firm offers its investment banking services primarily to high-growth small and mid-cap companies, as these companies provide significant M&A, spin-off and fundraising activity. I expect these businesses to generate strong growth once the macro worry passes. This will drive RILY’s overall revenue growth. The company’s financial advisory, market research and trading services remain stable and are poised for higher growth once inflationary pressure gradually subsides.

Wealth management

RILY’s wealth management business is its other growth driver. Under the Wealth Management umbrella, the firm offers investment strategies, executive services, pensions, tax services and settlement solutions. The company’s wealth management solution is differentiated from that of competing companies because the company offers unique market insights to provide unbiased advice for making sound financial decisions. Moreover, the company provides education to its customers and the customers are well informed before making any financial decisions. In this way, they protect and grow their capital.

I expect RILY’s wealth management business to drive its long-term revenue growth. According to one report:

The global Wealth Management Market size was valued at USD 1.25 Trillion in 2020 and is projected to reach USD 3.43 Trillion by 2030, growing at a CAGR of 10.7% from 2021 to 2030 .

RILY’s wealth management business is also expected to grow at a similar pace.

Competition

RILY belongs to a highly competitive industry. Its competitors are BGC Partners (BGCP), StoneX Group (SNEX), Cowen (COWN), Piper Sandler Companies (PIPR) and Perella Weinberg Partners (PWP). RILY competes with these companies based on the breadth of its business platform, customer service and pricing.

RILY’s main competitive advantage is that it regularly launches new and innovative products for its customers. As a result, the company gains new customers and retains existing customers. The company is committed to incremental innovation, which creates new value for its shareholders. The company acquired FocalPoint Securities earlier this year, which is its other competitive advantage. FocalPoint Securities is an independent investment bank. The acquisition resulted in a significant expansion of RILY’s M&A advisory business. Both competitive advantages will lead to significant revenue growth for the company.

Second quarter 2022 results

The company reported operating revenue of $266.6 million in the second quarter of 2022, down 12.5% ​​year-over-year. The company’s GAAP net loss for the quarter was $142.2 million and adjusted operating EBITDA was $74.2 million.

RILY reported strong results for the second quarter of 2022. The company’s non-cyclical businesses performed well. The company reported a drop in investment and its underwriting business failed to grow. However, despite this, the company’s dynamic platform has shown continued resilience. The company has earned over $17.00 per share for its shareholders since 2019. The company’s operating EBITDA was $366 million in the twelve-month period, compared to $114 million in 2019 , which generated significant profits for shareholders.

The company’s objective is to generate recurring EBITDA growth. To achieve this, the company relies on less cyclical and less episodic activities. These companies have helped the company generate more capital to support the dividend, and the company has paid a $1 dividend to shareholders in the second quarter of 2022. I expect the company to offer a higher dividend in the coming years, thanks to the recurring growth in EBITDA.

Evaluation

RILY’s competitors include BGC Partners, StoneX Group, Cowen, Piper Sandler Companies and Perella Weinberg Partners.

RILY

BGCP

SNEX

COW

PIPR

PTP

TTM price at sales

1.74x

0.81x

0.03x

0.76x

0.99x

0.43x

TTM price to book

3.23x

2.24x

1.74x

1.03x

1.74x

2.40x

TTM price to cash flow

10.59x

4.14x

7.31x

10.70x

8.91x

2.91x

(Data Source: Alpha Research)

RILY is valued expensive compared to its competitors. Its balance sheet consists of $216.1 million in cash and cash equivalents and $4,601 million in debt. The company is heavily leveraged, but high growth prospects in the company’s capital markets and wealth management businesses are responsible for its expensive valuation. Over the past five years, the company’s revenue has grown at a CAGR of 24.82%, albeit from a small base. Over the next five years, I expect the company’s revenue to grow at a high single-digit CAGR. These are the reasons for the expensive valuation of the company. The outlook for the investment banking business is strong as corporate profits have remained strong in recent years. Additionally, corporate America is still sitting on piles of cash, which I think would be easily deployed in the next round of mergers and acquisitions. In addition, the global wealth management environment will continue to remain strong over the next five years, leading to steady cash generation for wealth management companies, especially players with strong expertise in this space. , like RILY. These factors should drive RILY’s revenue growth to a higher trajectory relative to its peers, and its stock price will rise.

Assuming that RILY’s revenue will grow at a CAGR of approximately 9% over the next five years, I’ll find out the company’s long-term share price. The company’s revenue over the last 12 months is $911.90 million and, at a CAGR of 9%, the company’s revenue by mid-2027 will be $1,403.00 million. dollars, or $49.59 per share. Over the past five years, the company’s shares have traded between price and sell multiples of 0.65x and 1.95x. I expect that over the next five years, the company’s price to sales multiple will peak at around 2.00x, due to growing demand for its services. Applying a price-to-sell multiple of 2.00x on RILY’s revenue per share in mid-2027, I get $99.18 as the company’s stock price in mid-2027.

Risks

RILY’s investment banking clients generally retain the business on a short-term, commitment-by-commitment basis, rather than on a recurring, long-term basis. The company is engaged in merger and acquisition transactions, corporate finance and numerous strategic advisory services. Since these commitments are singular in nature, the company seeks ongoing commitments at regular intervals to remain profitable and in good financial health. Otherwise, the company’s revenue growth and operating results could be adversely affected.

RILY can grow its business through new product and service offerings, and through strategic investments, acquisitions and joint ventures. The company’s future financial results could be negatively affected if it fails to properly manage its growth opportunities. Additionally, if the company engages in acquisitions or joint ventures, it may need to issue new shares. This could have a dilutive effect on the shareholders of the company.

Conclusion

RILY’s capital markets business is expected to grow significantly over the next five years, driven by strong capital markets business around the world, which could begin at any time over the next two years, a once inflationary pressure and the tight monetary policy regime are over. The company’s wealth management business will also grow significantly over the same period. Company shares have a significant long-term advantage, and long-term investors can buy company shares around the current price to maximize yield.

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