Spun-off from Automatic Data Processing in 2007, Broadridge is North America’s market leader in both investor communications and trade processing. The company is best known for proxy services, in which it processes nearly 80% of proxy voters in the domestic market. In this business, Broadridge works with broker-dealers, corporate issuers, and investors to facilitate proxy voting and tabulation. In its trade processing business, Broadridge processes $5 trillion in daily trading volume primarily for mid-sized capital market firms.
The investment case for Broadridge is bolstered by dual, intertwined competitive advantages. The company’s core competency is the management of complex tasks for its clients. As a result, scale and scope of operations are critical business success factors, allowing Broadridge to perform proxy voting and trade processing more efficiently than any one client individually. This leads to high customer switching costs, the second competitive advantage. New and existing business tends to remain with Broadridge as the client outsourcing decision typically negates the need for in-house expertise; the company’s 98% client retention ratio is evidence of the ‘stickiness’ of its customer relationships.
At a high level, Broadridge can be thought of as the plumbing of the North American capital markets in that the company performs unglamorous, yet mission-critical business functions. However, our analysis indicates that the company’s monetization model provides a layer of insulation against capital markets fluctuations. The company generates revenue on a per-communication basis (proxy business) and a blend of per-trade and fee-for-service basis (trade processing). Importantly, both of these activities have remained historically resilient in periods of market volatility, as evidenced by the company’s stable results in the 2008/2009 bear market.
We expect Broadridge to grow and create business value due to increasing capital markets activity and regulatory complexity. Additionally, the company has an ongoing acquisition program aimed at identifying new technologies that can benefit from Broadridge’s established customer network and strong brand equity. Finally, Broadridge collects a vast amount of data as part of its ongoing business efforts, and we believe the company’s effort to analyze and package this data represents an underappreciated long-term opportunity.
In our view, Broadridge demonstrates many of the ‘Quality Growth’ attributes we favor including competitive advantages, high returns on capital, and consistent free cash flow generation. We are pleased to add it the portfolio.
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