Description

Description:

BGC Partners Inc. represents a favorable risk-reward at current levels. The company was written up by Smarkeu in April ‘21 and I would encourage folks to revisit that write-up for additional background. Back then, the stock was at $5 and it’s down around 12% due to the business more or less bumping along the bottom since then. 

Nonetheless there have been a number of very positive developments since then with several more on the way (potentially) in short order. As well, the company offers a very cheap valuation and a solid investment grade corporate credit profile. In addition, insiders including management, Board members and employees collectively own 17% of the stock so interests should be aligned.

Company Overview:

BGC provides a wide range of services, including trade execution, broker-dealer services, clearing, trade compression, post trade, information, and other services to a broad range of financial and non-financial institutions. Through brands including Fenics, BGC Trader, Capitalab, Lucera, and Fenics Market Data, BGC offers financial technology solutions, market data, and analytics related to numerous financial instruments and markets. BGC, BGC Trader, GFI, Fenics, Fenics Market Data, Capitalab, and Lucera are trademarks/service marks and/or registered trademarks/service marks of BGC Partners, Inc. and/or its affiliates. BGC’s customers include many of the world’s largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, and investment firms.

Positive Developments in the last two years:

1. Sale of insurance brokerage business: BGCP finalized the sale of its insurance brokerage business for $535mm in November 2021 to the Ardonagh Group. This represented a favorable valuation of around 13x EBITDA for an asset that was non-core to the rest of the company.

2. The company has reduced its fully diluted share count from 540mm to around 493mm. This has been done primarily via buybacks in part utilizing the cash from the aforementioned sale of the insurance brokerage business.

3. Continued shift from BGC’s traditional voice/hybrid trading business towards the company’s Fenics platform (its higher margin, technology driven trading business). Fenics represented 25% of total revenue in 2022 vs 17% in 2020 and 9% in 2014.

Recent Uptick in Business Across All Categories:

When the company announced its Q4 earnings in February, it noted for the first time in years that the macroeconomic backdrop was becoming a tailwind. In December, the company saw brokerage revenue increase 10% on a constant currency basis with similar results in the YTD period 2023 through the end of February. The company explained the sudden change (revenues has been drifting down for years) thusly:

“Manufactured zero and near-zero interest rates over the last fourteen years has caused the break down and disappearance of the historic correlation between issuance and trading volume growth. With meaningful interest rates and issuance that is multiples above 2008 levels, we believe the return of this strong positive correlation will drive our trading volumes significantly higher. This has set the stage for broad-based growth across our businesses and asset classes. We expect continued growth throughout 2023 and for the foreseeable future.”

Put another way, with the complete change in interest rates and the volatility around different parts of the curve, traders finally have a backdrop that can be profitable (and necessary) to increase their transaction volumes. 

At the end of March, the company noted that, as a result of the SVB/FRC et al banking crises, they saw a little bit of a slowing at the end of Q1. This was disappointing given the fresh momentum the company previously reported and caused the stock to decline significantly in recent weeks. On the other hand, the company said they would be “slightly” below the midpoint of their previously announced earnings guidance for Q1– hardly a catastrophe and probably not surprising given the unusual financial conditions related to the banking issues.

Valuation:

Given the history of the business the past few years and the fact that the majority of the company’s revenue still come from its legacy voice/hybrid trading business, i think it’s fair to say that BGC is not likely to trade a premium to the market anytime soon. That said, the valuation today is extremely cheap and probably implies a far worse future than I’d expect. On analysts estimates, the company trades at 5.1x 2023 expected earnings and 4.3x 2024. This is very cheap for a company with a good balance sheet, a valuable business in Fenics that is growing, a newly favorable macroeconomic backdrop and a number of potential catalysts going forward.

Additional Potential Catalysts:

1): C-Corp Conversion: 

On November 15, 2022 BGC Partners, Inc. and BGC Holdings, along with certain other affiliated entities, entered into a Corporate Conversion Agreement in order to reorganize and simplify BGC's organizational structure by converting from an Up-C to a “Full C-Corporation.” Upon completion of the Corporate Conversion Transactions, the stockholders of BGC Partners and the limited partners of BGC Holdings will participate in the economics of the BGC businesses through the same publicly traded corporate entity, BGC Group, Inc. By simplifying the organizational structure, the Corporate Conversion Transactions are intended to improve transparency and reduce operational complexity.

I believe that conversions to simpler and more accessible corporate structures can have a meaningful positive effect on valuation. Anyone who followed the alternative investment managers the last few years saw that those who converted from partnership models to full C-Corps typically saw a significant increase in their stock prices and valuations even with an increase in their corporate tax rate (usually the reason the previous structure existed in the first place). The benefits come as a result of the companies’ equity being much easier to own for a broader set of investors as well as simpler to understand.

2) Launch of FMX Futures Exchange during 2023: The company has been promoting (i wouldn't necessarily describe Howard Lutnick as NOT promotional) the launch of its new platform to compete against the futures business of industry giant CME for a long time now and it has clearly been delayed. That said the company is in the (hopefully) last stages of getting regulatory approvals and announcing partners for the initiatives. It hopes to partner with the investment banks who themselves would do much of the trading on the platform. It’s a large opportunity but very hard to handicap at this stage. I do think it represents some interesting optionality given that clearly nothing is priced into the stock for anything of the sort at present. The company describes the main points as the following: 

• Developed to challenge the status quo of the current futures market

• Will deliver a comprehensive and efficient cross margining platform across

U.S. dollar-based futures and interest rate swaps

• Will offer a U.S. Rates futures platform for U.S. Treasury & SOFR futures

products

Disclaimer: do your own work! this stock price could decline! not a recommendation

Catalyst

Continuation of favorable trends from Q1

Corporate conversion

FMX futures business launch/potential success