Why this investment bank’s stock price is soaring

The past few years have not been good for investment banking due to the high interest rate environment. However, mid-market investment banks Stifel Financial (NYSE:SF) had a pretty good fourth quarter, with the stock posting its biggest gain on Wednesday.

Stifel shares rose about 5% on Wednesday to nearly $74 per share after the company beat earnings estimates. While investment banking revenues have been declining, Stifel has gained strength in its wealth management business.

Improved fourth quarter performance through various models

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

Investment banking revenue fell 8% to $201 million, but Stifel achieved growth in its global wealth management segment. The company reported revenue of $766 million in the quarter, up 3% year-over-year, and wealth management revenue surged 14% to $443 billion, up 14% on the back of rising asset levels.

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

“Given our position as a leading asset management firm and mid-market investment bank and our growing volume of business, we believe there is significant opportunity 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. But its asset management business saw revenue rise 8% to $3 billion this year, a record for the company. Stifel added 40 financial advisors, a 28% increase in recruited advisors. Meanwhile, the institutional group, which includes investment banks, saw its profits fall 20% to $1.2 billion this year.

Investment Banking Profits Will Rise in 2024

Stifel could see better results from its investment bank in 2024 as conditions are expected to improve. The company said in its outlook that it expects investment banking revenues to increase 25% this year and wealth management revenues to increase 12% in 2024.

According to Stifel’s own guidance, net operating revenue for fiscal 2024 will be between $3.55 billion and $3.8 billion, up from $3.2 billion in 2023, and net revenue will be between $4.55 billion and $4.9 billion, up from $4.3 billion last year. That is the goal. Stifel also expects this year’s coverage ratio to be between 56% and 58%, equal to or potentially lower than the 58% ratio in 2023.

Last year, Stiefel’s stock price rose 21%, and over the past 10 years, it has recorded an average annual return of 8.3% as of January 23. Analysts expect Stiefel’s growth to be minimal this year and have given a consensus price target. That’s about $76 per share, a few percentage points higher than it is today. Wednesday’s gains put Stifel’s stock up about 7% year to date.

Due to a reasonable valuation of approximately 16 times earnings and expectations of increased sales, we believe that Stifel’s stock price may rise slightly higher than the consensus target price. Investors will also benefit from a 17% dividend increase this quarter, to 42 cents per share.

Stifel probably won’t put out the fire, but its strengths in asset management and investment banking in an improving environment make it a solid option for some investors.