Friday, February 20, 2009

GFI Group Reports tough quarter

GFIG reported non-GAAP EPS of $.09 for the fourth quarter of 2008, versus analyst expectations of $.13. While the poor showing does not impact my reasons for owning the stock, I was hoping for a more resilient quarter despite the terrible environment. Brokerage revenue declined 19% from a year ago and can be broken out by segment: +3% in equities, -21% in credit, -37% in financial, and -30% in commodities. In constant currencies brokerage revenue was actually up $5 million, but FX was a very big drag this quarter.

Margins were under pressure as revenue declined meaningfully. Compensation was only down 9% in the face of the 19% decline in brokerage revenue. This was disappointing because I thought this line item would show more variability with revenue. The only hints from the earnings call were that they continue to amortized sign-on bonuses from the rebuild of their NYC credit desk and there has been a 10% mix shift away from electronic platforms (in Europe) which would effectively increase the pay-out ratio. I am inclined to agree with management that the mix shift is a product of the extreme volatility and disruption, not a longer term phenomenon. Non-comp expenses were down 3%. These expenses are harder to adjust, especially short-term, so I am less concerned here.

GFIG increased cash on their balance sheet by $100 million and announced their normal cash dividend for shareholders of record on March 17th.

In addition to the color on FX, the most significant part of the earnings call was their outlook for 2009. Micky Gooch described what he considers to be a "worst case" scenario - although I think he was using this term loosely - as $700 million in revenue at a 7-9% pretax margin. If you play that through you get about $.30 of EPS for a stock now trading at about $3 per share.

I still believe in this story. While I was hoping for a better quarter, they made money in a horrendous environment, have a solid balance sheet without the credit risk of most financials, and I think they are very well positioned to benefit from the normalization I expect in the credit markets. As I write this, I see my limit order just filled as I bought a few more shares at $2.94.

One last tidbit from the call. Mickey was asked if they would be expanding their client base given the weakness of the dealer community. I asked him the same question in September of 2008 and he didn't think so because he didn't want to risk antagonizing the dealers. Today, he said "Yes". No details, but I have thought they should do this for awhile now and it looks like management thinks so too now.

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