B. Riley Financial: An Undiscovered Gem With Impressive 5-Year Growth Rates Trading At 3x EBITDA - Over 100% Upside Potential (NASDAQ:RILY) (2024)

B. Riley Financial (NYSE: NASDAQ:RILY) ("RILY", or “the Company") represents a compelling opportunity to acquire a long-term compounder at a steep discount to its peer group. Revenue has grown from $190 million in 2016 to an estimated $750 million in 2020, a ~41% CAGR. EBITDA has grown from $48.9 million to an estimated $325 million or at a ~60% CAGR, and the regular dividend has grown from $0.32 to $1.50. I expect this growth to continue for two reasons: 1) as RILY has grown, its cost of capital is decreasing and I expect this to not only continue but accelerate and 2) RILY has achieved “escape velocity” due to its size. This became apparent with them lead managing the $300 million Telos (TLS) IPO last month, something that would normally be handled by a bulge bracket bank like Morgan Stanley (MS), JP Morgan (JPM) or Goldman Sachs (GS). The company’s larger size allows it to access larger and larger opportunities and I think they are in window where the business will continue to grow rapidly because of this.

Despite the outstanding growth RILY trades at ~3x operating EBITDA for 2020 versus peers such as Houlihan Lokey, Moelis and PJT Partners who trade in excess of 14x EBITDA. For readers wondering why I'm looking at EBITDA as opposed to EPS, RILY doesn't have a big NIM business. Rather, these are mostly fee businesses. So I see the EBITDA measure as most appropriate. EBITDA is a metric the company began disclosing this year to help see through the volatility of its investment portfolio.

I believe this discount is primarily due to lack of visibility. The company has no sell side coverage and does limited investor relations outreach. I expect this to change over time, but at the very least the company will screen very attractively for quantitative investors once they officially report their impressive Q4 numbers that were preannounced today. If the company were to trade at a 40% discount to its peers, the stock would trade at $111 per share. Given the growth profile versus its peers I would argue it should trade at least inline if not at a premium. At 14x EBITDA the stock would be $156 per share.

Business Overview

Headquartered in Los Angeles, B. Riley Financial is a provider of financial services and solutions. Services range from wealth management and brokerage by their core business to asset disposition by their Great American subsidiary. Riley segments their business as follows (numbers are on a TTM basis ending 2020 Q3):

  • Capital Markets – ~$488MM in revenue / ~$165MM of segment EBIT
  • Auction and Liquidation – ~$28.7MM in revenue / ~-$42.5MM of segment EBIT
  • Valuation and Appraisal – ~$35.8MM in revenue / ~$9MM of segment EBIT
  • Principal Investment – ~$89.4MM in revenue / ~$34.8MM of segment EBIT
  • Brands – ~$15.1MM in revenue / ~-$3.2MM of segment EBIT

Capital Markets, comprising ~74% of revenue with 30%+ segment EBIT margins, provides IB, brokering, consulting, advisory and other services. Auction and Liquidation, comprising ~4% of revenue, provides retail store liquidation and industrial asset disposition. Valuation and Appraisal, comprising ~5% of revenue, does what it says on the can. Principal Investments, comprising ~14% of revenue with nearly 40% segment EBIT margins, consists of acquired businesses, most notably United Online and magicJack. Brands, comprising ~2% of revenue, consists of revenue generated via brand licensing of the BR brand and trademarks.

While Riley is typically viewed a traditional investment bank, it should be clear that this categorization is not totally accurate. While the company does primarily offer IB services, the additional segments create a more diversified business than what might appear at first glance. As a result, we believe that B. Riley is less cyclical today given the counterforces of segments like Principal Investments and Valuation and Appraisal.

Looking deeper into the business, you find that B. Riley provides attractive equity exposure underpinned by a quality management team with proven capital allocating abilities. Their business segments are complementary and continually throw off cash from a growing and relatively stable base. And to another attractive layer, the CEO owns a substantial portion of the stock, pays himself very modest cash compensation, and continues to buy more stock in the open market. Ultimately, we view the current risk reward profile as attractive as the market has yet to realize the future value creation by the company.

Investment Highlights

A long position in RILY is merited by the following:

Attractive Valuation: Riley trades at an undeserving valuation, at ~3x FY20 operating EBITDA for a business that has EBITDA CAGR of ~60%. Moreover, RILY trades at over a nine turn discount to less diversified investment bank peers such as HLI and MC. Utilizing a 10x multiple on ~$290MM of FY20 operating EBITDA leads to a $111 per share price. Please see the "valuation" section below for greater color.

B. Riley Financial: An Undiscovered Gem With Impressive 5-Year Growth Rates Trading At 3x EBITDA - Over 100% Upside Potential (NASDAQ:RILY) (1)

Continued Share Gains: Riley’s IB & brokerage business (Capital Markets) continues to consolidate share and win lead deals, indicative of a broader industry trend of larger players stealing share at the expense of smaller brokerages who are faltering/consolidating. As I mentioned above, being bigger will allow RILY to get bigger faster. Lead managing the TLS IPO is the prime example of this.

Opportunistic Investments: Significant business value has been created by opportunistic investments in their Principal Investments segment, which has grown from ~$30MM in 2016 to ~$100MM in 2019, as well as strategic acquisitions completed in their Capital Markets segment. More recently, B. Riley’s Eos Energy (EOSE) SPAC deal has turned out to be a home run.

Great American: While most of the talk is around their Capital Markets business, B. Riley’s original Great American business (Auction & Liquidation and Valuation & Appraisal) remains a gem with low capital requirements and a long runway for growth. Looking more near-term, the Great American segment could see increased demand given the extent COVID has negatively impacted brick and mortar retail.

Superior Capital Allocation: Opportunistically engaging in M&A has become an important element to B. Riley’s growth, as partly reflected above by the growth in the Principal Investment’s division. Their M&A activities go beyond Principal Investments as two strategically sound acquisitions have been made in the Capital Markets division. In reviewing prior M&A deals, it is clear that CEO Bryant Riley has a good handle on capital allocation.

  • United Online – B. Riley paid ~$71MM to acquire United Online in mid-2016. When B. Riley acquired the business, United Online was generating ~$90MM in revenue and ~$30MM in EBITDA, yielding a sales multiple of under 1x and an EBITDA multiple of just over 2x. While this business was facing a near certain terminal decline, the cheap asset provided management with the ability to redeploy the cash flows into other assets, such as the two strategic deals listed below that they did in the Capital Markets space.
  • FBR & Co. – Riley acquired FBR in 2017 for ~$160MM, which equated to a ~1.3x multiple to 2016 FBR sales of ~$120MM. Adjusted EBITDA was negative when acquired (~-$5MM).
  • Wunderlich Securities - Riley acquired Wunderlich in 2017, bolstering their Capital Market segment further. Total consideration for the deal was $67MM, putting the deal at 5.7x EBITDA and ~0.6x sales on Wunderlich’s TTM estimated revenue and EBITDA of ~$117MM and $11.7MM, respectively.

On a combined basis for the latter two (FBR + Wunderlich), B. Riley paid ~$227MM, or approximately 1x sales.

Capital Returns: Over the past five years, Riley’s dividend growth rate has compounded at 30.5% per Bloomberg.

Improving Market Position: Riley has dramatically expanded the scale of their Capital Markets business over the past half decade with revenues of ~$40MM in 2016 versus revenues of ~$485MM in 2019. This comes largely as a result of two aforementioned acquisitions: FBR and Co., which serves as a regional broker/dealer, and Wunderlich Securities, which also provides IB services.

Such expansion has occurred over a period when other small-cap brokers have been faltering, a trend we think will continue further. Coupling this dynamic with the great capital allocating skills of management, this should provide Riley with the opportunity for continued accretive growth via further market consolidation / share gains, allowing them to expand their size further and become a more valuable player in the market and to their clients.

Backing up one step, it is important to note that scale is a critical element in the competitiveness of firm’s operating in Capital Markets as you are not only able to cover more businesses, but also leverage fixed costs. In 2016, the segment margin for their Capital Market’s division was just over ~15% compared to ~37% in 2019. This expansion reflects Riley’s ability to leverage back office (HR / accounting) costs which are relatively fixed versus the more variable (although partially fixed) costs paid to their analysts/revenue generating employees.

Why Does this Opportunity Exist?

Street is overlooking B. Riley due to the following factors:

  • No sell side coverage and multiple disparate cash generative businesses. As management’s points out on the 2020 Q3 CC, limited coverage is likely a result of (1) people who could provide coverage are competitors and (2) the business is more complex than average. Such limited coverage has caused limited awareness in the stock, and consequently, limited change in how the business should be contextualized.

Founder is the Largest Shareholder and Keeps Buying.

B. Riley’s founder owns a significant amount of the stock. Riley’s CEO, Bryant R. Riley, owns just under 21% of outstanding stock with ~5.2MM shares. This is up from his 4.7MM share holding at the end of 2019. More attractively, Bryant has been making open market purchases over the past year to take advantage of the attractive valuation. His most recent purchase was on 11/03 when the stock price was ~$25/share, purchasing an additional 60K shares, which follows a ~40K purchase in September.

Valuation

Our assumption is that B. Riley achieves ~$290MM in adjusted operating EBITDA in FY2020 which is the upper end of their guidance announced today. At ~10x EBITDA, or more than a five-turn discount to peers, RILY fair value is ~$111 per share or roughly 170% upside. In line with the peer group or 14x EBITDA is $156.

B. Riley Financial: An Undiscovered Gem With Impressive 5-Year Growth Rates Trading At 3x EBITDA - Over 100% Upside Potential (NASDAQ:RILY) (2)

Source: Author Ests, Company Filings & Bloomberg

This article was written by

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Over 20 years of investing, deal making and capital raising experience. Debt, equity, special situations, short selling. Long value with a catalyst. Short overpriced with a catalyst.

Analyst’s Disclosure: I am/we are long RILY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am/we are long EOSEW and TLS.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

As an expert in financial analysis and investment, I can confidently assess the information provided in the article on B. Riley Financial (NYSE: RILY). My expertise lies in analyzing financial statements, understanding market dynamics, and evaluating investment opportunities. Here's an in-depth breakdown of the concepts mentioned in the article:

  1. Company Overview:

    • B. Riley Financial (RILY) is headquartered in Los Angeles and provides a range of financial services and solutions.
    • Core services include wealth management, brokerage, asset disposition through its subsidiary Great American, and various financial services.
  2. Financial Performance:

    • Revenue growth: From $190 million in 2016 to an estimated $750 million in 2020, representing a ~41% compound annual growth rate (CAGR).
    • EBITDA growth: From $48.9 million to an estimated $325 million, translating to a ~60% CAGR.
    • Dividend growth: The regular dividend has increased from $0.32 to $1.50.
  3. Growth Drivers:

    • The company's growth is attributed to two main factors: decreasing cost of capital as it grows and achieving "escape velocity" due to its size.
    • Recent achievement: Leading the $300 million Telos (TLS) IPO, typically handled by larger banks like Morgan Stanley, JP Morgan, or Goldman Sachs.
  4. Valuation Metrics:

    • Despite impressive growth, RILY trades at ~3x operating EBITDA for 2020, while peers like Houlihan Lokey, Moelis, and PJT Partners trade in excess of 14x EBITDA.
    • EBITDA is emphasized over EPS due to the nature of RILY's fee-based businesses, and the discount is attributed to a lack of visibility.
  5. Business Segments:

    • Capital Markets: ~74% of revenue, providing investment banking, brokering, consulting, advisory, and other services.
    • Auction and Liquidation: ~4% of revenue, focusing on retail store liquidation and industrial asset disposition.
    • Valuation and Appraisal: ~5% of revenue, offering valuation services.
    • Principal Investment: ~14% of revenue, consisting of acquired businesses, including United Online and magicJack.
    • Brands: ~2% of revenue, generated via brand licensing of the BR brand and trademarks.
  6. Investment Highlights:

    • Attractive Valuation: Trading at ~3x FY20 operating EBITDA, a significant discount to peers.
    • Continued Share Gains: Consolidating share in the investment banking and brokerage business.
    • Opportunistic Investments: Creating business value through strategic acquisitions and investments, such as the Eos Energy SPAC deal.
    • Great American: Highlighting the potential of the Auction & Liquidation and Valuation & Appraisal segments, especially given the impact of COVID on retail.
  7. Management and Capital Allocation:

    • CEO, Bryant R. Riley, owns just under 21% of outstanding stock, demonstrating confidence in the company.
    • Management has shown effective capital allocation through M&A activities, including acquisitions of United Online, FBR & Co., and Wunderlich Securities.
  8. Market Position and Expansion:

    • Riley has expanded the scale of its Capital Markets business, experiencing significant revenue growth.
    • Market consolidation and share gains are expected to continue, driven by the competitive advantage of scale.
  9. Opportunity and Risks:

    • The opportunity lies in the market undervaluing RILY due to limited sell-side coverage and the complexity of its diversified businesses.
    • Risks include limited awareness and understanding of the company's business model.

In conclusion, the article presents a compelling case for B. Riley Financial as an attractive investment opportunity, supported by its robust financial performance, growth drivers, diversified business segments, and effective capital allocation by management.

B. Riley Financial: An Undiscovered Gem With Impressive 5-Year Growth Rates Trading At 3x EBITDA - Over 100% Upside Potential (NASDAQ:RILY) (2024)
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