Investment Technology Group: A Conviction Buy
Paul Price submits:
Investment Technology Group, Inc. (ITG) is an independent agency brokerage and financial technology firm. ITG partners with asset managers work to deliver global liquidity, while improving absolute performance throughout the investment process. US operations provide trade execution, trade order management, network connectivity and research services to institutional investors, brokers, alternative investment funds and money managers. Canadian operations provide trade execution, network connectivity and research services. The European segment includes the trade execution, trade order management, network connectivity and research service businesses in Europe, as well as a technology research and development facility in Israel. ITG’s Asia Pacific segment encompasses trade execution and network connectivity.
As technology continues to break down barriers in global trading, ITG has evolved into a fully integrated global trading model that truly follows the sun. ITG maintains 15 offices in 10 countries.
ITG suffered through a poor year in 2009. EPS fell from an all-time high of $2.61 to just $0.98 ((GAAP)), and the shares tanked from $53.30 at their 2008 peak to yesterday’s close of $16.57. On a pro forma basis 2008 came in at $2.63 and 2009 dipped to just $1.34 /share. Certainly, the old high was too optimistic in light of the market melt-down of late 2008 – early 2009. What’s not so obvious is the huge buying opportunity that now presents itself.
The company is extremely healthy. Cash assets far exceed total debt and book value finished 2009 at a record level of $19.73/share. Every major estimate looks for much improved earnings for both 2010 and 2011. The consensus view is tightly bunched at around $1.60 and $1.80 for this year and next, making ITG’s current multiple about 10.3x and 9.2x the projections. Those are the lowest P/Es on record for this fine company.
ITG now trades for a 16% discount to its book value. This also, is unprecedented in ITG’s past trading history. When markets tanked in late 1998 and mid-year 2004, ITG shares were crushed just as they have been lately. At the very bottom of 1998, ITG hit $7.50 (split-adjusted) but rebounded to $32.30 in less than 10 months. At its low, ITG shares touched $11.90, allowing bargain-minded investors to reap huge gains when the shares picked up to $59.10 by early 2006. Price/Book value at the 1998 low was 2.32x. P/BV at the 2004 nadir was 1.35x. Today’s price/book value is far cheaper than at either of those other two great entry points.
Here are ITG’s per share numbers from continuing operations as reported by Value Line:
|
Year
|
Sales
|
C/F
|
EPS
|
B/V
|
Avg. P/E
|
52-Wk. Range
|
|
2002
|
8.15
|
1.99
|
1.59
|
7.50
|
22.7x
|
20.40 – 54.40
|
|
2003
|
7.47
|
1.38
|
0.89
|
8.08
|
19.0x
|
10.90 – 24.70
|
|
2004
|
7.97
|
1.43
|
0.95
|
8.83
|
15.5x
|
11.90 – 20.20
|
|
2005
|
9.47
|
1.93
|
1.50
|
10.72
|
16.6x
|
16.60 – 40.90
|
|
2006
|
13.68
|
2.59
|
2.05
|
13.88
|
22.6x
|
34.40 – 59.10
|
|
2007
|
16.82
|
3.39
|
2.48
|
16.20
|
16.8x
|
35.40 – 48.70
|
|
2008
|
17.61
|
3.90
|
2.61
|
18.17
|
13.3x
|
13.00 – 53.30
|
|
2009
|
14.58
|
2.85
|
0.97*
|
19.73
|
21.0x
|
16.80 – 28.90
|
|
* pro forma EPS for 2009 = $1.34 v. $2.63 in 2008
|
||||||
New ‘Dark Pool’ trading through ITG’s flagship POSIT Marketplace was recently rolled out in Asia with the intent of gaining a competitive edge through the reduction in trading costs via reduced spreads, delay costs and ‘market impact’.
If the earnings estimates are anywhere near on target and ITG rebounds to even a 14 multiple we’ll see at least $22.40 by year-end 2009 and $25.20 by December of 2011. That would represent a > 35% gain over the next 9 months and over 52% before the end of 2011.
Are those reachable goals? Just take a glance at the chart above to confirm that ITG changed hands at $24.70 and higher in 8 of the past 9 years. They were $28.90 just a few months ago and have occasionally been double those target prices. The absolute lows for ITG were $34.40 and $35.40 in 2006 and 2007 respectively
.
.(Click to enlarge)
With shares this morning at $16.50 you are only fractionally over the 52-week low of $16.02 and nowhere close to their yearly high of $28.90. I see low risk and huge reward potential here.
Disclosure: Author long ITG shares and short ITG puts
Investing, Long Term Investment, stock market | admin March 31, 2010 | 
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