BGCP - BGC Partners

[ratiman]

BGC Partners is an "interdealer broker" that trades bonds, stocks, forex, etc with other dealers, not the public. On March 26 it reduced its dividend from 56c to 4c. That hit the stock as it was recovering from the March lows and now it's at $2.81 from the ~$6 where it traded pre-dividend cut and pre-Covid. What's interesting is that it announced that it's business *had improved* at the same time that it cut the dividend by more than 90%. The dividend investors have been selling the stock and it's stuck at $2.81 even after announcing improving results.

 

The other issue facing the stock is investment in Fenics, the electronic platform. Right now only about 13% of revenue is electronic. The electronic platform requires a lot of investment and that may also be putting pressure on the dividend. Here is the CEO from most recent earnings in February:

 

We have strong investments in our new businesses, and we want to grow our business and convert it to electronics . . . We feel that . . .last year was this top area of net investment cost, and everything going forward now starts to improve. And you will see dramatic numbers, obviously, with these businesses breaking even and growing in 2021. Obviously, that's what we expect. We will get through. We know our investors care about the dividend. Board, obviously, takes that under advisement every quarter. But we feel, as we are right now that we see the path forward, which will allow us to grow our business to dramatically add shareholder value to -- we hope to maintain the dividends, and we hope to deliver material economic value to all of our stakeholders as we enter 2021.

 

With the improving results, BGC should be able to generate $1 per share in ebitda. If the dividend were reinstated in a year back to 56c, the stock would trade back to $6.

 

 

 

 

 

 

 

 

[keerthiprasad]

The dividend cut scared a lot of people away. I think it was a reasonable move on the part of management. I am still not convinced that Fenics will break-even next year, but we will see. Dividend improvement and reorg to C corp (currently an odd LP structure) should help the price come back up. Where the company sits today, they can easily afford the dividend but are being cautious.

[BG2008]

Just want to say that this name has been a value idea for 10 years.  It is now down 50% since then. 

[ratiman]

Maybe you're forgetting the spinoffs. CEO Lutnick is actually pretty good at creating value. BGC created Newmark from scratch and then spun it out. We'll see what they do with the insurance business. Of course as value investors we don't believe that price determines value.

 

 

[ratiman]

The dividend cut scared a lot of people away. I think it was a reasonable move on the part of management. I am still not convinced that Fenics will break-even next year, but we will see. Dividend improvement and reorg to C corp (currently an odd LP structure) should help the price come back up. Where the company sits today, they can easily afford the dividend but are being cautious.

 

Fenics is profitable, but I think as BGC puts additional products on Fenics, those new business lines aren't immediately profitable. The real concern with Fenics, I think, is that it isn't growing fast enough. Last quarter even saw a decline because it was dragged down by the rest of BGC.

[keerthiprasad]

Same concern with Fenics. We haven't seen a significant shift of business to the platform yet (~15%).

 

BG2008 - share price was appropriately lower after spinoff of Newmark last year.  This was built from scratch and excellent value.

A definite criticism is the increase in share count over the years. These guys hand shares out like candy.

[thepupil]

so i used to be a bond trader (2011 - 2013) at a top bank.

 

my very limited understanding of what these guys do is

 

a) take folks like me circa 2011-2013 out to lots of boozy dinners, sporting events, etc.

 

b) facilitate high volume, extremely low commission trades between banks. if you work for Jefferies and want to buy a bond that Credit Suisse owns, you go through an inter-dealer broker and give them a little risk free commish.

 

at least in my time, there was virtually no difference between the IDB's so you worked with whoever took you to the nicest dinners. these folks are salespeople to the salespeople and traders to the traders. it takes a special kind of person to be an IDB, you have to have strong tolerance and really make an effort to not get gout by age 35.

 

commissions - salaries/bonus - extremely healthy entertainment budgets.

 

what interest me about COVID and inter dealer brokers is that right now, you can't take anyone out to a boozy dinner, but you can get a commission.

 

might we see margin expansion due to decreased entertaining expenditure?  ;D

 

It looks like this is in the line item "selling and promotion" on the income statement.

We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses.

 

Note that "selling and promotion" is 3.9% of revenues and $81 million last year. In the context of this business which is basically a passthrough where the company earns a very low margin as a percent of total revenue, a change in this operating expense item could

have an outsized albeit temporary boost to the bottom line.

 

there may be other negative factors which offset this, but just thought i'd share that potentially dated and certainly anecdotal perspective.

 

never thought my early 20's boozing could provide and investment insight

[BG2008]

 

never thought my early 20's boozing could provide and investment insight

 

Early 20's boozing provides the best insights into life.  I tried to explain the concept of "corporate infighting" to someone once.  He had no clue the kind of pettiness that happens at large IBDs. 

[ratiman]

Interview of Lutnick last week: He says that Fenics should accelerate in Q3&4 and that the tsunami of treasury issuance will lead to "enormous volume growth" and "benefit to our business will be awe-inspiring" and "it's not here today but it's a freight train and will be the greatest event in bonds ever" and that Fenics is the new eSpeed and is undervalued. "Next four quarters should see Fenics growth resume and make a clear difference to bottom line." Dividend comes back next year when revolver is paid down or sooner if insurance business is sold.

 

http://www.wsw.com/webcast/pipersandler7/bgcp/index.aspx

 

 

[keerthiprasad]

"BGC retains BAML for strategic review". Regarding insurance business, as alluded to in last call.

 

https://insuranceinsider.com/articles/134119/ed-and-besso-owner-bgc-retains-baml-for-strategic-review