Knight Capital Group
[NDQ:NITE] - $14.25 Dec. 14, 2009
Unbelievably cheap for no good reason.
Knight Capital Group provides electronic and voice financial security trade execution services to buy-side, sell-side, and corporate clients as a market maker, agent, and electronic execution provider. They are the largest wholesale market making firm for U.S. equity securities.
After hitting a multi-year high of over $23 /share in early October NITE shares have dropped to near their March 2009 panic lows again. Why? They reported that trading volume was down sequentially from October’s extraordinary levels. Here is the company’s own news release…
“Trading activity slowed in November despite the continued rise of the major market indexes… Nevertheless, Knight recorded solid year-over-year growth in dollar value traded due to higher volumes across products and services.” Average daily dollar value traded in November 2009 was $24.6 billion, down approximately 11.2% from $27.7 billion in October 2009 and up approximately 10.4% from $22.3 billion in November 2008. Average daily U.S. equity trade volume in November 2009 was 3.6 million, down approximately 9.6% from 4.0 million in October 2009, and down approximately 14.0% from 4.2 million in November 2008. Average daily U.S. equity share volume was 13.1 billion in November 2009, down approximately 0.7% from 13.2 billion in October 2009, and up approximately 247.2% from 3.8 billion in November 2008.”
Knight is net debt free with more liquid assets than total debt. Earnings are substantial with Zacks estimating $1.44 /share this year and $1.59 /share for 2010. Book value is at record levels with an estimated $11.60 or so expected by year-end.
Here are Knight’s per share numbers from continuing operations as reported by Value Line:
At today’s quote of $14.25 NITE trades for just 9.9x this year’s and < 9x next year’s estimates. Excepting the panic lows of 2008 that’s about the lowest valuation ever for this fine company. In five of the six years from 2004 – 2009 NITE shares traded for more than 1.7x book value at their highs. In four of those years the P/BV exceeded 2x at the annual highs.
A bounce back to even 12.5x 2010 estimates would bring these shares back to $19.87. A return to 1.7x expected December 31, 2009 book value would also justify a high $19’s 12-month price target. That leaves at least a 35 – 40% upside from here.
Is $19.50 - $20 a reasonable expectation? NITE shares have exceeded that goal price in each of the past four calendar years including 2009.
Value Line is using a 14 multiple as ‘normal’ in figuring their 3 – 5 year target price. Morningstar carries a 4-star rating on NITE (with 5 being best) and sees ‘fair value’ as $21 /share. Standard and Poors lists a 12-month target price of $24 /share.
At a time when most stocks are nowhere near their 52-week lows you can grab shares of NITE today at just 6.5% above its nadir and 38.3% below its October 2009 high.
Ironically, the most recent full page report from Value Line was dated Oct. 23, 2009 when the shares were listed as $22.40. They ranked NITE shares as outperformers from that relative high point. Now, at a much better price, they have turned neutral on the shares. That’s typical for momentum investing. For me, though, a low entry price just increases my level of interest.
I’ve added to my position today and I’m also writing [selling] some LEAP puts for 2011 and 2012 expirations. Here are the current prices as of 3:35 PM on 12/14/09…
Selling these long term puts locks in lower than current pricing while providing nice upside over the next 13 to 25 months.
Disclosure: Author is long NITE shares and short NITE options.