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Investment Thesis
StoneX Group Inc. (NASDAQ:SNEX) is a financial services business connecting customers to global markets ecosystem by providing them with digital platforms and various services. The company has recently acquired Cotton Distributors (Swiss-based CDI-Societe Cotonniere De Distribution), which I believe can boost StoneX Group’s growth by expanding its customer base and increasing its access to the emerging markets. It has also reported strong fiscal fourth quarter results, reflecting its rapid growth and well-positioning in the market.
About SNEX
StoneX Group deals in operating a financial services network that uses a distinctive combination of digital platforms & end-to-end clearing and execution services to link traders, investors, companies and organizations to the market ecosystem on a global level. It has a huge customer base of more than 420,000 clients in more than 180 countries. It has maintained sustainable growth of its customer base over the past several years which has significantly helped to drive recurring revenue.
The client retention and acquisition are mainly fueled due to linking clients to 35 derivative exchanges, offering various liquidity venues and a blend of electronic trading platforms which have also acted as a competitive advantage for the company. The company conducts its business in four operating segments: Commercial, Institutional, Retail and Global Payments.
In the Commercial Segment, the company provides a broad range of products and services which includes hedging & risk management, voice brokerage, execution & clearing, physical trading, logistics services, market intelligence and commodity financing. The Institutional segment offers equity trading services to its clients which enables them to access liquidity and facilitates efficient clearing and execution in global securities exchanges. The Retail segment offers trading services in the global financial markets. These services include precious metals trading, spot foreign exchange and CFDs on cryptocurrencies, indices, bonds, options, commodities and individual equities. The Global Payments segment deals in providing custom-built foreign exchange and treasury services. These services are mainly provided to banks, charities, commercial businesses and governmental & non-government organizations.
Acquisition of Cotton Distributors
According to the U.S. Department of Agriculture, cotton production levels have experienced robust growth over the last decade in Brazil. This growth is expected to increase in the coming year, which would be mainly driven by strong global prices and comparatively weaker exchange rates. Though the production levels can be slightly affected by fertilizer disruptions, however, it is still expected to cross the historical levels due to rapidly increasing demand which can make it the top cotton producing country.
Identifying these current demand trends, the company has recently announced the acquisition of Cotton Distributors, which deals in cotton merchant business on a global level. It has a well-built network of producers in Brazil and West Africa. StoneX can highly benefit from this deal, as it will be expanding its commodities trading business by increasing its cotton trading and hedging capabilities.
I believe this acquisition can act as a primary catalyst to boost the company’s growth, as CDI is a strong company, trading in cotton from the last 20 years with a huge client base which gives StoneX an opportunity to expand its access in the emerging markets. The company offers an extensive portfolio of products and services which includes risk management programs assisted by cotton specialists who guide the customers with price exposures and customize plans to mitigate risks. I think by leveraging the capabilities of this wide-ranging portfolio, the company can significantly increase its revenue further expanding its profit margins. I believe this growth can be sustained in coming times and we can expect a long-term upside as a result of robust growth in cotton production.
Strong Fourth Quarter Results
The company has recently announced its strong fourth quarter results. It has reported revenue of $16.381 billion, which is 38% growth compared to $11.85 billion of the same period of the previous year. The revenue growth was mainly driven by significant increase in the company’s customer base and strong performance of operating segments. The Commercial, Institutional and Global Payment segments experienced a revenue growth of 43%, 87%, and 29% respectively whereas the Retail segment reported a 48% decrease in the revenue compared to the same quarter of the previous year. Net income saw an astonishing 616% YoY increase from $7.3 million to $52.3 million. Increased net income has resulted in diluted EPS of $2.49 which is 592% growth compared to $0.36 of Q4 2021. It reported diluted EPS of $10.01 for FY22, which is 74% growth compared to previous year. The company ended the fourth quarter with $1.1085 billion in cash and cash equivalents.
The strong results of the company are a reflection of the increased client base and increased interest rates. I believe it can sustain this growth in the next year as well, as it has recently acquired Cotton Distributors.
Sean M.O’Connor, CEO of StoneX Group, has stated:
“These results demonstrate the resiliency of our company during times of volatile markets and geo-economic uncertainties, and validates the ongoing investments we’ve made in the business. We realized strong growth across our operating segments resulting from increased client engagement as well as growth in our client base. We benefited from favorable market conditions with elevated volatility and increased interest rates on our growing client float but have not yet realized the full impact of rising interest rates on our earnings. We are confident that StoneX is well-positioned in fiscal 2023 to capitalize on the growing value we believe our franchise can deliver to empower our clients across all asset classes.”
What is the Main Risk Faced by SNEX?
The company is highly affected by fluctuations in short-term interest rates. These interest rates are volatile and depend on various external factors beyond the company’s control. If the short-term interest rates become low, it can negatively affect the company’s interest-related income. Such conditions can impact its revenue, further contracting its profit margins.
Valuation
The company has reported strong fourth quarter results outperforming the market expectations. I think this growth of the company can be sustained for a longer period, as it has recently acquired Cotton Distributors, which can add to the revenues and expand its profit margins by increasing its client base.
After considering all the above factors, I am estimating EPS of $15 for FY2023 which gives the forward P/E ratio of 6.74x. After comparing the forward P/E ratio of 6.74x with the sector median of 10.28x, we can say that the company is undervalued. I believe the company might gain significant momentum from the recent acquisition of Cotton Distributors Inc. I estimate the company might trade at a P/E ratio of 10.05x, giving the target price of $150.75, which is a 48.99% upside compared to the current share price of $101.18. Low short-term interest rates can affect the financial performance of the company. I believe in that case, it can contract the profit margins and EPS of the company.
|
Scenarios |
EPS Estimates |
P/E Ratio Estimates |
Target Price |
|
Best case |
$15.00 |
10.05x |
$150.75 |
|
Bear case |
$14.15 |
9.50x |
$134.42 |
I believe in the bear case scenario of low short-term interest rates, the EPS of FY2023 might be $14.15 and estimate that the company might trade at a P/E ratio of 9.50x, which gives a target price of $134.42, representing an upside of 32.85%.
Conclusion
StoneX Group Inc. is a financial services company that links the customers to the global markets ecosystem with the use of digital platforms and its broad array of products and services. It is exposed to the risk of fluctuations in short-term interest rates which can affect its financial performance. The company has recently announced acquisition of Cotton Distributors, which I believe can accelerate its growth by increasing its access to emerging markets and by significantly increasing its customer base. It has recently reported strong fourth quarter results, mainly driven by an increase in the client base and elevated interest rates. After analyzing all the above factors, I assign a buy rating to StoneX Group Inc.
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