GFI Group (NSDQ: GFIG) is one the worlds leading inter-dealer brokers specializing in over the counter derivative products. The firm, while being quite successful in the past, has had by all accounts a rough start to the year. Its stock price has been hurt by a variety of factors, whether it is because of rouge traders at its competitors, the threat of a raid on its staff by its competitors or the fear that uninspiring financial markets will limit the firm’s clients ability or willingness to use its brokerage services. The quarterly report put out by GFI Group earlier this week for the first quarter of 2008 should put to rest all of these concerns as it shows a company hitting on all cylinders despite a decline of over 45% in its common stock for the year.
For the quarter the company reported revenue up nearly 31% year over year to $314.6 million and net income up nearly 46% year over year to .30 cents a share (.32 cents a share if you exclude extraordinary items). This was a substantial earnings beat and it positions the company to do quite well in the year ahead. GFI Group is expecting revenue growth for the second quarter to be in the range of 18-23% on a year over year basis. A substantial part of this growth will come from Europe and Asia where the firm grew 39% and 60% respectively. Currently, 48% of the firm’s revenue is derived from European operations, 42% from North America and a mere 10% from Asian operations leaving substantial growth possibilities.
The break down of their brokerage revenue for the quarter is quite positive and shows the company well positioned for the coming year. The robust trading by its clients in all areas shows that the firm’s franchise is strong despite the turbulence in the financial markets.
| 1Q 2008 Year of Year Revenue Growth | % of Revenue as of Dec. 31, 2007 |
Credit | 31% | 36% |
Financial | 16% | 19% |
Equity | 40% | 25% |
Commodity | 22% | 20%
|
These figures along with the companies recent acquisitions of Trayport, a commodity broker, along with European acquisitions in 2007 should continue to allow the company to move away from its slight dependence on the credit derivative market. Another interesting development going on at GFIG Group is the company’s efforts, in collaboration with CB Richard Ellis, to refine and further develop a product and market that will allow companies to use derivative products to hedge their real estate exposure. It should only be a matter of time before this product is actively used.
Over the last several years, net income at GFI Group has generally had a faster growth rate then its revenue growth rate. This trend should continue this year as the firm continues to apply leverage to its extensive infrastructure. This coupled with the significant decline of the stock price this year make shares in GFI Group particularly compelling and represents a rare opportunity to buy a growth stock at value prices. The trailing P.E. is approximately 15 while the forward P.E., by my calculations is below 10. If the company can grow revenue and net income somewhere between 20 and 30% this year, the shares could easily double during that time.
In the mean time, while you wait for this investment to bare fruit, the firm’s $270 million in cash on hand, .03 cent a share quarterly dividend and a large level of insider ownership will ensure that there is limited downside risk to the stock at this time.
For Further Review:
GFI Group's Quarterly Report
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