A good half of the art of living is resilience.” – Alain de Botton
Today we take an in-depth look for the first time Virtu Financial, Inc. (NASDAQ: VIRT). The stock has come under considerable pressure here in 2022, like most small and mid caps. Stocks now have a dividend yield of over four percent. However, the title is still seeing a considerable amount of insider selling. An analysis follows below.
Virtu Financial is headquartered in New York. The Company operates in two segments, Market Making and Execution Services. Virtu’s product suite includes broker-agnostic and multi-dealer execution, liquidity provisioning, analytics and platform offerings in workflow technology. The company’s solutions enable clients to trade on various venues across countries and across multiple asset classes, including global stocks, ETFs, currencies, futures, fixed income, crypto -currencies and other raw materials.
In addition, the company’s analytics platform provides a range of pre- and post-trade services, data products and compliance tools enabling clients to invest, trade and manage risk on all markets. As a market maker, Virtu Financial provides liquidity to some 25,000 different securities in approximately three dozen countries. The stock currently trades at just over $23.00 per share and has an approximate market capitalization of just north of $4 billion.
First quarter results:
On April 28, the company released the first quarter results. Virtu Financial posted GAAP earnings of $1.27 per share in the quarter, more than a quarter per share above consensus. Revenue fell just over 30% year-over-year to just north of $700 million, which was also significantly above expectations.
The company credited strong results in Asia and ETF market performance as well as commodity market performance for beating analysts’ expectations in the quarter. It should be noted that the company’s business model is impacted by the level of trading volumes as well as the volatility realized in the various 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 it buys or sells securities.
At the beginning of June, the company announcement it was partnering with Citadel Securities to build a “cryptocurrency trading ecosystem.” Venture capital firms Sequoia Capital and Paradigm will also help build this decentralized marketplace. It is expected that other wealth managers and market makers will join this initial consortium prior to launch.
Analyst Commentary and Review
The analyst community has soured on Virtu since its last quarterly earnings report. Since then, Goldman Sachs and UBS have reissued Hold ratings with identical price targets of $30. Citigroup followed suit with a price target of $37.50, as did Evercore ISI with a price target of $34.00. Rosenblatt Securities ($52 price target) and JP Morgan ($37.50 price target, down from $40 previously) maintained buy ratings for the stock.
Less than four percent of the outstanding float is currently held short. The company’s balance sheet also looks decent (above) even though it is rated BB-. The company had a debt-to-adjusted EBITDA ratio of 1.7 at the end of the first quarter. A beneficial owner sold more than 7 million shares in mid-January and early February this year. Two other CEOs sold just over $3 million worth of shares in total in early May. It should be noted that there has been no insider activity in stocks over the past two months. Additionally, the company has been a strong buyer of its own stock in recent quarters.
Current analyst consensus is that the company is making about $3.80 per share earnings in fiscal 2022, even as revenue declines in the teens to about $1.65 billion. That leaves the stock selling at around six times forward earnings and two and a half times earnings. That seems more than a reasonable estimate, although revenues are expected to continue to decline this year. Especially when you add a dividend yield of over four percent via a low payout ratio.
There are options available against this equity and they appear liquid. It makes a simple covered call viable strategy. Collecting an option premium while gaining some downside protection in this tough market while collecting quarterly dividend payouts seems the way to go to initiate a small ‘watch the article‘ held at Virtu.
Drink the waters meant to drown you. ”― Nelou Keramati