Knight [NITE: $15.98] is the largest wholesale market making firm in U.S. equity securities. Knight provides market access and trade execution services across multiple asset classes and offers capital markets services to corporate issuers and private companies. The Company has three operating segments. Their Equities segment includes market-making and institutional sales of global equities, futures and options. The FICC segment includes research, voice sales and fixed income trading, plus foreign exchange transactions. NITE’s Corporate segment provides financial services-oriented opportunities, allocates, deploys and monitors all capital, and maintains all corporate overhead expenses and all other expenses that are not attributable to the Equities and FICC segments.
Knight’s volatile shares and their current low price seem to offer an ideal platform for option traders that like to sell both calls and puts relating to one underlying stock. Knight recently completed the sale of $325 million (plus a $50 overallotment provision) in 3.5% convertible notes due 3/15/2015. The conversion price was set at $20.87 /share or 32.5% above the price at the time of issuance. The low interest rate and the well out-of-the-money conversion ratio speaks well of the market’s judgment of NITE’s good prospects.
Management has fully hedged their exposure to potential dilution should conversion occur due to a rising share price.
NITE is offered at just $15.98 this morning despite Zacks estimates for 2010 – 2011 of $1.59 and $1.88 respectively. That puts their multiples at just over 10x this year’s and 8.5x next year’s expected EPS. Those are extremely low by historical standards for NITE on both an absolute and relative basis. Value Line notes their 10-year median P/E as being 21x and assumes a normalized multiple of 14x in calculating their own 3 – 5 year target pricing.
If NITE’s earnings come in as expected that would put their year-end 2010 goal price at > $22 or more than 39% above the current quote. Is that a crazy thought? No. Knight shares hit $23.11 last October and peaked at $20.50 and $21.80 in 2006 and 2007 when EPS came in at $1.49 and $1.24 – well below this year’s estimates.
Standard and Poors and Morningstar both see ‘fair value’ as well above today’s price. Their views are now at $17.80 and $21 respectively.
Here are two proposed buy/write plays for NITE that make sense to me right now:
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[NDQ:NITE] - $14.25 Dec. 14, 2009
Unbelievably cheap for no good reason.
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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.
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NITE shares had hit a multi-year high of $23.11 in October before somewhat weaker than expected September EPS knocked their shares back to today’s $16.40 price.
Zacks now expects Knight to earn $1.43 this year and $1.60 in 2010.
Here are NITE’s per share numbers from continuing operations as reported by Value Line:
| Year |
Sales |
C/F |
EPS |
B/V |
Avg. P/E |
| 2004 |
5.71 |
0.51 |
0.36 |
7.79 |
31.3x |
| 2005 |
5.57 |
0.51 |
0.34 |
7.93 |
26.5x |
| 2006 |
9.18 |
1.73 |
1.49 |
9.29 |
10.5x |
| 2007 |
9.89 |
1.59 |
1.24 |
9.67 |
12.4x |
| 2008 |
11.46 |
2.28 |
1.94 |
11.40 |
8.4x |
| 2009* |
10.65 |
1.80 |
1.43 |
11.55 |
12.6x |
* 2009 data includes Q4 estimates
The company is almost debt-free with over $400 MM in treasury cash far exceeding total debt of about $140 MM. Value Lineassigns NITE a ‘B++’ financial strength.
Knight’s P/BV is now just 1.4x versus an industry average of 3.07x and the S&P 500’s 3.42x ratio. NITE has sold above 2x book value on many occasions over the past decade.
Value Line sees a long-term multiple of 14 in calculating their 3 – 5 year target price. Based on next year’s estimate of $1.60, that would bring NITE shares to $22.40 within 12-months. That would translate to a 36.5% gain from the current quote and yet would be less than the actual high set just last month. Morningstar is in basic agreement with a published ‘fair value’ for NITE of $21 /share.
Here’s a nice buy/write combination for the next 14+ months that can generate outstanding results with only moderate risk.
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I wrote positively about Knight Capital Group here back on April 21, 2009 after the shares had closed at $14.84. With the market recovery and good second quarter earnings, NITE has risen to $18.15 /share. It still presents good opportunity from today’s level for those sophisticated enough to augment their stock purchase with the sale of options.
Knight Capital Group (NDQ:NITE) August 12, 2009 close: $18.15
52-week range: $11.03 (Oct. 10, 2008) - $19.98 (Feb. 9, 2009)
Knight is the largest wholesale market making firm in U.S. equity securities. They execute transactions for institutional customers as well as broker-dealers. NITE also actively trades for its own account.
Second quarter earnings from continuing operations came in at a better than expected $0.52 versus $0.32 and NITE shares trade nearer their 52-week high than their low. The valuation, however, still looks relatively cheap.
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Knight Capital Group [NDQ:NITE]: April 20, 2009 $15.14 1:15 PM EST
52-week range: $11.03 (Oct. 10, 2008) - $19.98 (Feb. 9, 2009)
Knight Capital and its subsidiaries are the largest wholesale market makers in United States based equity securities. They execute trades for institutional clients and broker dealers. They had been involved in Hedge Fund management but that operation (51% owned Deepwater Funds) is now being treated as a discontinued operation with a pending sale agreement in place.
Knight remained solidly profitable in 2008 despite the horrendous market conditions. Earnings per share were $1.63 versus $1.23 (excluding $0.33 /share in one-time gains in Q4 2008).
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