TW - Tradeweb Markets: Quality Name At A Price

Summary

• Tradeweb Markets is a real quality name, displaying solid long-term growth.
• The company has been a very stable grower, and subsequently has been awarded very steep valuations.
• If shares revisit the lows of this autumn, I see appeal; but at current levels, shares are still a bit too pricey for me.

Back in the summer of 2020, I concluded that the situation was a tough trade for the shares of Tradeweb Markets ( TW ) . This came after the operations and shares had seen a great performance since the company went public in the spring of 2019.

The company thrived in an environment which saw above-average volatility following the outbreak of the pandemic, yet a 45 times earnings multiple simply felt too rich to create anywhere near a compelling risk-reward situation.

A Recap

Tradeweb is a huge trading platform, founded in 1996 with a mission to design and develop better electronic marketplaces. The company has evolved to facilitate trading on a range of products through its electronic platforms, including credit, interest rates, money markets and equity products, with clients like banks, financial institutions and even central banks using its services.

The company was part of Refinitiv, which was part of Thomson Reuters (TRI) when both companies came together. Blackstone (BX) acquired Refinitiv from Thomson Reuters and subsequently brought Tradeweb (in part) public in April 2019.

The company was sold to the public at $27 per share, and TW stock rose to $35 per share on its first day of trading. With 222 million shares outstanding, the company (or at least its equity) was valued at $7.5 billion. This valuation was rich for a business which posted $648 million in sales in 2018 as the market awarded an 11 times sales multiple to these revenues, which rose 21% on the year before.

The company posted operating earnings of $118 million and adjusted earnings of $225 million, equal to about a dollar per share. The resulting 35 times earnings multiple, based on the closing price of the first day of trading, looked a bit rich.

Through August 2020, shares had risen to levels in the mid-fifties. This came as 2019 sales rose 13% to $775 million, with adjusted earnings posted at $231 million, as the fourth quarter earnings results trended at a run rate of around a dollar per share, in line with the expectation at the time of the IPO. The volatility induced by the outbreak of the pandemic provided a good set-up, with first quarter sales up 25% and adjusted earnings coming in as high as $0.37 per share.

Activity cooled down a bit in the second quarter, with second quarter sales growth slowing down to 12%, as adjusted earnings came in at $0.30 per share. With shares trading at $57 and earnings power trending around $1.50 per share based on the first quarter results, valuations were far too rich to see appeal.

While I have grown more appreciative of the stability of the business and its long-term growth, the valuation was simply far too high to see appeal in my book.

Doing Well

Since urging a somewhat cautious tone at $57 in the summer 2020, shares have risen in a rather steady fashion to the $100 mark by the end of 2021. Shares had fallen back to the low-fifties in October of last year, before now recovering to a current level of $71 per share.

Early in 2022, the company posted its 2021 results, a year in which revenues rose another 20% to $1.08 billion. Following some dilution, due to a rising stock price, GAAP earnings of $227 million worked down to earnings of $1.09 per share, with adjusted earnings posted at $1.63 per share, excluding a relatively modest stock-based compensation expense. The company ended the quarter with a near billion net cash position, equal to about $5 per share.

The company has seen continued and double-digit growth in 2022 with first quarter sales up 14% and second quarter sales up another 14% (despite intensifying currency headwinds). Third quarter results, released in October, showed an 8% increase in sales, this time including a 5-point headwind from currencies, as the softness in the share price triggered the company to announce a $300 million buyback program in December.

Early in February, Tradeweb posted a mere 6% increase in fourth quarter results, now held back by 3 points as a result of a strong dollar. Adjusted earnings for the year rose from $1.63 per share to $1.90 per share amidst a stable share count of around 237 million shares (210 million shares outstanding and the remainder of LLC interest to be potentially exchanged for stock) with net cash up to $1.3 billion.

With shares now trading at $71, the unleveraged assets command a $65 per share valuation, equal to a 32-33 times earnings multiple based on earnings power trending around $2 per share here. Growth has been hurt by lower activity levels, and to another extent by lower prices of products being traded.

Starting 2023 Solid

Alongside the release of the 2022 results, Tradeweb posted the activity levels for January with average daily volumes of $1.15 trillion being up nearly 3% on the year before. This marks a big improvement from a more than 4% fall on this metric in the fourth quarter, boding well for an acceleration of growth in the first quarter, certainly as the dollar has recently seen some weakness as well.

This set the company up for another year of double-digit growth in all likelihood, yet expectations remain pricey, as Tradeweb showed that it is quality. Given the large net cash position, swings in the value are interesting here, as any (unexpected) pullback to levels to their fifties looks like a decent entry opportunity here.

For further details see: