2023-09-16 08:09:10 ET
Summary
- BGC Group Inc.'s share price has been steadily increasing as the financial sector recovers from earlier volatility.
- The company's recent financial report showed strong revenue and EBITDA growth, with energy and commodities contributing significantly.
- The launch of the FMX platform could be a bullish sign for BGC and potentially attract new customers, leading to double-digit EPS growth.
Introduction
The share price for BGC Group, Inc. ( BGC ) has been on a steady trajectory upwards as the financial sector is recovering after the volatility it saw earlier this year when two major regional banks went under. Even if BGC doesn't operate in that industry, they still seem to have experienced a drawdown in the share price, as a lot of companies did.
The most recent report from the company showed a strong increase in the revenues and EBITDA, which both increased by double digits. A lot of the additional revenues came from energy and commodities, growing 48% YoY and ending the quarter at $98 million.
Company Structure
BGC is a broker-dealer and capital markets technology provider with a history spanning back to its inception in 2004. This pivotal moment marked its transformation into an independent entity, as it was spun off from its parent company, Cantor Fitzgerald, emphasizing its resilience and adaptability over the years.
BGC initially made its mark in the market by introducing a comprehensive voice/electronic brokerage service. Over time, it has broadened its scope to encompass various asset classes, extending its reach to securities brokerage and trading in equities, fixed income (rates), foreign exchange, and specific derivative instruments. Distinguishing itself as a broker/dealer, BGC assumes the responsibility of retaining securities on its balance sheet and fulfilling the vital role of market liquidity provider in the domains it operates within.
The company has done a very good job at diversifying the revenue streams and right now the largest portion is from rates at 29% which I wouldn't necessarily consider overweight by any means. The second-largest source though is energy and commodities, which is growing quite quickly, as we saw in the last report. Now making up 20% of the revenues. The management has made it clear they will continue to invest in this segment and I think for the third quarterly report we will see another jump up in the portion of revenues that it makes up.
Earnings Transcript
From the last earnings call by the company, there are some valuable comments that I would like to bring up here. The CEO Howard Lutnick had the following to share with investors.
“With respect to FMX, we are awaiting CFTC approval. We expect to announce our strategic investors and the transaction details in the fourth quarter. FMX's US treasury platform continues to outperform the industry and captures market share from the CME. In US interest rate futures, we will execute the same playbook. But now with the added support of these strategic partners who are the largest users of these products. FMX represents the unique opportunity to reshape the US interest rate cash and futures markets”.
The launch of the FMX platform could be a bullish sign for the company and rally the share price. BGC has been investing very strategically in creating new platforms that can rival existing methods and software. The addition of this new platform to the markets could help BGC gain a vast new amount of customers and clients. This could certainly make the earnings estimates a reality, which is expecting BGC to post double-digit EPS growth.
The COO of BGC also had some more comments on the quarter and the performance, and how their asset base is now shaping up.
“Energy and Commodities now represents our second largest asset class behind rates. Our Rates Credit and Foreign Exchange businesses generated solid year-over-year growth driven by strength in inflation products as well as European, emerging market fixed income and foreign exchange products. We expect continued improvement across fixed income and foreign exchange markets going forward”.
As I said earlier in the article, BGC has been able to grow its revenues very well, much thanks to the growth in this segment of the business. Energy and commodities represented nearly $100 million in revenues in the last quarter, and I would expect it to continue moving upwards as BGC continues to invest here.
Valuation & Comparison
Right now, I think the most appealing factor behind investing in BGC is the low multiple that the company is trading on. The bullish outlook for the FMX platform is certainly one too, but buying shares at an earnings discount of nearly 30% is intriguing.
I think that BGC is a growth company and should be valued as such as well. The company could very well achieve a p/e similar to the sector if they continue to post strong results like the last quarter. This leaves a potential 30% upside from here, which I find to offer a good risk/reward opportunity right now. With a decent dividend yield as well, it certainly helps the investment case some more. The addition of revues from the FMX platform I think will further carry BGC to be an outperformer in the market.
Risk Associated
The prevailing concern revolves around the potential for prolonged stagnation in BGC. It appears that BGC may not be positioned as a front-runner in its sector, nor does it seem to be on a trajectory of growth. Consequently, there is a distinct possibility that the company could continue to face a decline in the foreseeable future. This decline can be attributed to the formidable competition that BGC contends within its industry.
To delve deeper into the matter, BGC finds itself in a challenging landscape where rival companies vie for market share and dominance. This competitive pressure exerts a constant force, making it increasingly difficult for BGC to carve out a sustainable path forward. In essence, the risk of stagnation is exacerbated by the industry's ever-evolving dynamics and the need for constant innovation and adaptability to remain relevant.
The company suggests that its revenues might have reached considerably higher levels if it weren't for the persistent strength of the US dollar relative to the Euro and other global currencies. However, this situation prompts us to contemplate a significant scenario: the likelihood that the US dollar will maintain its robust position for an extended period, possibly spanning multiple quarters. So in conclusion, a strong prolonged US dollar could be a challenging factor to the revenues of the company. If the world markets continue to look worrisome as the fears of recessions increase, then the US dollar will continue to look like a safe haven I think, and rally more.
Investor Takeaway
The price for BGC has rallied in the last few months but continues to be at an appealing price point in my opinion. The earnings discount is enough to warrant a buy I think and with the company also investing heavily in the energy segment I think further earnings growth is possible. I like where the business is heading and will be rating it a buy as such.
For further details see:
BGC Group - Strong Investments Is Showcasing Results Right Now