It has been something of a roller coast ride for shares of FXCM Inc (NYSE:FXCM) since announcing its Q4 financial results last week.
FXCM shares first reacted by shooting up nearly 30% last Friday, as traders were encouraged by FXCM’s healthy Q4 results and its plans to shed non-core assets to pay back the $300 million loan from Leucadia FXCM took subsequent to the now-famous events surrounding the Swiss Franc spike on January 15.
However, as we wrote at the time, ‘that’s not the problem.’ FXCM’s issues (at least as far as public shareholders go) are what value is left for public shareholders with the upside on an eventual sale going mostly to Leucadia, even if things turn around. And even before considering that, it has to be questioned whether or not FXCM’s clients are abandoning the company, with the 40% reported drop in February retail trading volumes.
And it seems as though some of the leading Wall Street analysts covering FXCM now agree with us.
FXCM’s up-and-down share price past five days. Source: Google Finance.
Research analysts at both Keefe Bruyette & Woods and Citigroup have chimed in over the past few days with different versions of the same theme – even if things go well at FXCM, most of the upside will accrue to Leucadia, which can force an eventual sale of the company. And there is no assurance that things will necessarily go well.
FXCM shares have reacted by shedding about a fifth of their value, dropping from a high of $2.77 last Friday to close at $2.21 on Wednesday.
To take the more rosy of the two analyst views (Citigroup now has a price target of just $0.50 for the stock), we look at Keefe’s analysis. Keefe believes that the ‘residual value’ which will eventually accrue to FXCM shareholders is likely to be in the range of $0.42 to $2.79 per share.
The analysis assumes that FXCM is indeed able to sell its non-core assets – FXCM Japan, FXCM Hong Kong, FXCM Securities, FXCM’s 35% stake in FastMatch and 50.1% stake in Lucid & V3 – for at least $250 million. And, that the eventual sale of FXCM will be done at an EBITDA multiple of between 6x (low estimate, $0.42 per share) and 10x (high estimate, $2.79).
That is a fairly wide range, leading Keefe to choose a price target of $1.50, around the midpoint of their valuation range.
Keefe also points out that going forward, standard methods of valuation (e.g. P/E multiple, multiple of cash flow, etc.) won’t really work for FXCM, given the complicated upside-sharing deal with Leucadia.
So who was buying FXCM shares last week after Q4 results were announced?
An analyst familiar with FXCM noted to LeapRate that institutional investors are largely out of the stock now, with the buyers out there being mostly retail traders – who might not as readily understand the situation and the complexities of the Leucadia deal.