Here goes my analysis on Investment Technology Group (ITG). Today I thought it was long over due that I need to put down the words meant in good faith many months back; my analysis of stocks from my perspective. I will try to keep to these points: 1) Return on Equity, 2) Intrinsic Value, 3) Relative to Market and 4) Ethical Issues.
Note: I assume that reader does have access to Google finance or other finance media to look up company profiles and financial data.
Investment Technology Group (ITG)
1) Return of Equity (RoE)
For the past 10 years RoE has been around 16.4 percent. This is good but when I separated the 5 most recent years I realized RoE has been dropping to just 12.8 percent. The decline continues with 2009 RoE at 4.9 percent. The main causes for the decline were due in part to lower margins and asset turnover.
I gave ITG a pass in this area because I value the long term outlook – nevertheless I’m concern about the short term outlook for the company.
2) Intrinsic Value
Using the compound return on equity of 16 percent and a book value of 19.81 per share; I figured the intrinsic value for the company to be around 59.25 per share. With the margin of safety set at 60 percent, my target for the company is 35.55. In other words, the price of the company stock has to be under 35.55 before I can buy. The grade for this area is a pass because the current price is well under 35.55.
3) Relative to Market
The market cap for the company swings widely from 1.2 billion in 2000 to 1.7 billion in 2002; drops steeply to 755 million the next year, rebounded two years later to 1 billion. It gets better, at the height of the 2006 the company was worth 2 billion. Since then it has fallen steady to the end of 2009 at around 968 million.
In contrast, the revenue of the company is more stable; from 2000 they earned 297 million and increasing from this number with not too much differences every year to the height of 654 million in 2008. This same trend was reflected in the net income from 2000 to 2009; with lows and highs tracing the decline and rise according to its market cap. More interestingly, the book value continues to rise without any drop since 2009 from 210 million in 2000 to 867 million in 2009.
What does it mean? If you were to take the revenue in 2009 at 532 million, assuming without the drop in margin the company should be worth around 1.9 billion; this is according to its historical market cap. Would the company be able to increase their margin in the near future? I won’t be able to tell you that. What I could tell you is that the company market price per share has been trading between 61.2 to 10.88. At the current price of 17.92, the company’s market value is 784 million, while the book value at the end of 2009 was 867 million and the net current asset of 910 million (both more than market value!).
The grade for ITG is a pass with regards to how the market values the company going forward; lots of room to increase in value.
4) Ethical Issues
The company chairman and CEO are two different people; this i like. What I don’t like about this company is that the top 6 executives earned 10, 11 and 14 percent of the company’s net income from 2006 to 2008, respectively. Taking into consideration it had a fair corporate governance, so I gave the company a pass.
ITG received a pass for the overall grade and I quickly added this company to my portfolio.