BIDS - Virtu Financial: 4% Yield Reasonable Valuation

• Today, we put Virtu Financial in the spotlight for the first time.
• This small market maker and financial concern is selling for six times earnings and sporting a better than four percent yield after a recent sell-off.
• Insiders were heavy sellers earlier in 2022, but no selling has occurred in two months.  An investment analysis follows in the paragraphs below.

A good half of the art of living is resilience .” ? Alain de Botton

Today, we take our first in-depth look at Virtu Financial, Inc. ( VIRT ) . The stock has come under considerable pressure here in 2022, as have most small caps and midcaps. The shares now have a better than four percent dividend yield. However, the stock still is seeing a considerable amount of insider selling. An analysis follows below.

Company Overview

Virtu Financial is headquartered in New York City. The company operates in two segments, Market Making and Execution Services. Virtu's product suite includes offerings in execution, liquidity sourcing, analytics and broker-neutral, and multi-dealer platforms in workflow technology. The company's solutions enable clients to trade on various venues across countries and in multiple asset classes, including global equities, ETFs, foreign exchange, futures, fixed income, cryptocurrencies, and other commodities.

In addition, the company's analytics platform provides a range of pre- and post-trade services, data products, and compliance tools for clients to invest, trade, and manage risk across markets. As a market maker, Virtu Financial provides liquidity to some 25,000 different securities in approximately three dozen countries. The stock currently trades just over $23.00 a share and sports an approximate market capitalization of just north of $4 billion.

First Quarter Results:

On April 28th, the company posted first quarter results . Virtu Financial posted a GAAP profit of $1.27 a share in the quarter, more than a quarter a share above the consensus. Revenues fell just over 30% on a year-over-year basis to a tad north of $700 million, which was also significantly above expectations.

The company credited strong results from Asia and ETF market making as well as commodities market making for outperforming analyst expectations during the quarter. It should be noted that the company's business model is impacted by the level of trading volumes as well as the realized volatility in the different markets served by Virtu Financial. Virtu's sales stream is made up of commissions, fees, and revenue from execution/market-making services. The firm also makes money on the bid/ask spread when they buy or sell securities.

In early June, the company announced it was partnering with Citadel Securities to build a "cryptocurrency trading ecosystem. Venture capital firms Sequoia Capital and Paradigm will also help construct this decentralized marketplace.. The plan is for additional wealth managers and market makers to join this initial consortium ahead of launch.

Analyst Commentary & Balance Sheet

The analyst community has soured on Virtu since its last quarterly earnings report. Since then both Goldman Sachs and UBS reissued Hold ratings with identical $30 price targets. Citigroup did the same with a $37.50 price target as did Evercore ISI with a $34.00 price target. Rosenblatt Securities ($52 price target) and JP Morgan ($37.50 price target, down from $40 previously) maintained Buy ratings on the stock.

Less than four percent of the outstanding float is currently held short. The company's balance sheet also appears decent (above) even as it is BB- rated. The firm has a debt to adjusted EBITDA ratio of 1.7 as of the end of the first quarter. A beneficial owner disposed of over 7 million worth of share in Mid-January and early February this year. Two other company directors sold just over $3 million of stock in aggregate in early May. There has been no insider activity in the shares over the past two months it should be noted. In addition, the company has been a significant purchaser of its own shares in recent quarters.

Verdict

The current analyst consensus has the company making approximately $3.80 a share in profit in FY2022 even as revenues decline in the low teens to around $1.65 billion. That leaves the stock selling at roughly six times forward earnings and two and a half times revenues. This seems more than a reasonable valuation even as revenues are projected to continue to fall this year. Especially when one adds in an over four percent dividend yield via a low payout ratio.

There are options available against this equity and they appear liquid. This makes a simple covered call strategy viable. Collecting an option premium while garnering some downside protection in this challenging market while also collecting quarterly dividend payouts seems the way to go to initiate a small ' watch item ' holding in Virtu.

Drink the waters meant to drown you .”? Nelou Keramati

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