BGC Partners (BGCP) operates as a brokerage and financial technology company, offering various brokerage products, such as fixed income, foreign exchange, and equities, explains low-priced stock specialist Faris Sleem, editor of The Bowser Report.
BGC Partners is larger than our typical featured recommendations. Primarily considered a dividend stock in the past, BGCP has been generating more consistent top and bottom line results over the past few years.
The first half of 2020 shows BGC Partners on track to surpass its 2019 results. Driving the improvements are 23% growth in its credit business and 11% growth in insurance brokerage revenues.
Helping fuel the company's success is the Fenics technology platforms. Fenics is BGCP’s group of electronic brands, offering a number of market infrastructure and connectivity services.
National volumes for Fenics UST increased more than 70%, and management intends to roll out significant technological innovations in the third quarter.
Additionally, Fenics GO, a fully electronic options trading platform, doubled its volumes in the second quarter of 2020. With revenues trending in the right direction, management is taking multiple steps to deliver more consistent profit growth.
Overall, the company is growing at a steady pace with increasing profits and a promising outlook. Its balance sheet includes $463 million in cash but $1.2 billion in long-term debt, which is necessary for the company to maintain a competitive advantage in its industry.
BGCP is undervalued relative to its competitors. The industry average price/book ratio of 9.2 is high in comparison to BGCP’s ratio of 1.3. Additionally, the stock has a much lower price/sales ratio of 0.5 in comparison to the industry average of 3.7. Both metrics make BGCP an appealing long-term investment.
The global pandemic caused the company to cut its quarterly dividend substantially, from $0.14/share to $0.01/share. Considering the company has a large amount of cash and positive sales outlook, we do not agree with this decision.
However, it will be saving the company $144 million per year, which should bolster its balance sheet. The large cash position gives BGCP the option of ramping up its dividend again or repurchasing shares in the future.
So far, there is no evidence of selling as a result of the dividend cut playing a role in price action. Institutional investors are still accumulating shares, with new positions outweighing sold positions 4 to 1.
Perhaps the most exciting outlook comes from a mergers and acquisitions (M&A) standpoint. There has been a major spike in M&A for brokerage companies.
There have been many other acquisitions in the industry, and any one of BGCP’s business segments could be acquired, benefitting shareholders.
In our view, BGC Partners is undervalued and with a healthy balance sheet. The company’s large amount of debt is not concerning considering its large cash position and steady growth. The slow recovery of the financial sector offers a unique buying opportunity since the stock has barely rallied.
Moving forward, we would like to see consistent growth from Fenics and more profitability across the board. With institutional investors accumulating shares and solid fundamentals, the future is bright.
