BGCP - BGC Partners: Mediocre Broker-Dealer And A Hold At Best

2023-06-15 23:20:54 ET

Summary

• BGC Partners is a broker-dealer and capital markets technology provider with a fairly volatile set of financial metrics, including revenues now roughly on par with what it had in 2013.
• The company's financials show net margins that are generally under 10%, along with an overall debt position on its balance sheet and a share float that has increased fairly recently.
• This company does not appear to have differentiated itself in the broker-dealer/capital markets technology space and is still trading quite expensively as to its trailing GAAP P/E multiple.
• All of this makes for a hold rating at best for the stock, with the potential for further share price declines and no clear upside case.

Overview

BGC Partners ( BGCP ) is a broker-dealer and capital markets technology provider that has been in operation since 2004. At that time it became a standalone entity when it was spun-off from Cantor Fitzgerald. The BGC in the name refers to the initials of Cantor Fitzgerald's founder, Bernard Gerald Cantor.

The company entered the market with a combined voice/electronic brokerage offering and has since expanded it into other asset classes, now providing securities brokerage and dealing across equities, fixed income (rates), foreign exchange, and select derivative instruments. As a broker/dealer and not just a broker, BGC holds securities on its balance sheet and is tasked with providing liquidity in the markets within which it deals. Its overall offering also includes trade execution, market data, and analytics.

Since its public debut the stock has sold off precipitously. While showing a choppy pattern in the years since, the stock has never reclaimed anything close to its initial price levels and is trading at $4.76 as of this article. On the day of its IPO the stock fluctuated from its debut price of $23 a share to as high as $44 and change.

Clearly this stock has not done well. Nonetheless I wanted to look into it in order to see if opportunity may exist for myself and other investors. As a broker/dealer and capital markets technology provider, I know that BGC is part of a relatively finite universe of companies offering these kinds of services and technology. In some respects this creates a favorable long-term position for the firm and others of its nature.

This is primarily due to the economics of entering this market and continuing to operate within it. These economic parameters, including high technology and compliance costs, disincentivize new entrants and work to preserve margins and growth rates for players already in the market. I expect this effect to be material over the long-term and detailed some of my logic around this in a previous write-up . With that being said, I wanted to evaluate BGC's financials and valuation in order to see if it's a good company for investors looking for exposure to this space.

Financials

Given that BGC Partners is quite tenured, we have a long trendline of data to review and can readily take a broad lens to its financial performance.

Starting with the top line figures we see that BGC Partners shows a distinctly volatile picture. With revenues having occasionally increased by a significant amount y/y, the end result is that BGC now has revenues that are roughly at parity with what it had at the end of fiscal year 2013. That's not a very good showing to say the least. Immediately this looks to me like a picture of stasis as to its business, but I don't want to conclude that just yet.

Profits throughout this time have tended to be relatively minor, with the most recent year of operation showing only a 2.80% net margin for the firm. While these net income numbers have fluctuated somewhat over the last decade, they generally come below 10% overall, with a few exceptions such as 2018. This looks like the profit profile of a mature entity that is fairly saturated in its market.

Looking over at cash flows we do see a materially higher margin, with 2022 showing a 12.92% cash operating margin overall. These numbers also vary quite a bit but in are in general superior to the company's margins on an accrual basis, albeit with two years of relatively significant declines. If anything I put more stock in cash flow generation and consider this a good showing overall in light of the other metrics we have reviewed so far.

We can now look over to the firm's balance sheet, which strikes me as fair overall. The company has $4.48B of assets, including $493M of cash and equivalents, against $3.67B of liabilities. Of these liabilities, $1.28B is debt. Total debt has fluctuated for BGC Partners over the last decade and now sits at a middle of the road level for the firm. This has resulted in continued cash interest outlays, with last year's totaling 23.9% of the firm's operating cash flows. That is a fairly large amount to be spending on interest coverage, in my view.

The next salient aspect of BGCP's balance sheet is its common shares outstanding. While I would generally expect a tenured entity such as this one to not have a particularly variable stock of common shares, BGCP does have some variance in this regard. While last year's common share growth of 2.43% is not overly significant, and the year prior showed a decline, the 3 years prior to that represent a significant dilution over a relatively short time span. Essentially, there is not a clear trendline here; share float could very well increase or decrease in one year or the next. That means there is a prospect of dilution and also indicates that the company continues to make use of equity financing. This likely accounts for some of the downward pressure on its share prices.

Overall BGCP's financials point to a mature entity that doesn't have anything particularly exciting about it. The progression here is on the net an uncertain one, with some years showing gains and others losses across seemingly every metric. This is not a business with a clear direction as to its fundamental metrics and rather appears to be operating in a relatively volatile steady state.

Risk Profile and Valuation

The risk here looks to be one of further stagnation. Given that BGC Partners does not appear to be a sector leader or even a growing company, it is quite possible for it to experience ongoing decline on a forward basis. This stems from the significant competition that it has in the space, including from firms such as Broadridge . BGCP does not appear to have distinguished itself in terms of its offering and/or technology, something we see reflect in its financial statements.

As to valuation, the picture here is mixed. While on a discount as per its non-GAAP metrics, I am cautious to make use of this for financial firms in particular. Looking over at the company's trailing GAAP P/E multiple we see that it is actually quite expensive. Since it is not expected to generate a GAAP profit in the year ahead we do not have a metric for that at this time. This makes me believe that further depreciation in BGCP shares is very much possible.

Conclusion

There are better ways to invest in the capital markets technology space than buying BGC Partners stock. This company has not maintained differentiation in its market and appears to be in a state of statis overall. There is nothing particularly appealing here or any immediate fundamental indicator to the upside. Additionally, the company is still more expensive than may be expected on a GAAP P/E basis. All of this makes for a hold rating at best for the stock.

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