Friday, October 05, 2018

Flow traders intrinsic value?

Last year when the price of a Flow Traders share was roughly the same as today, I wrote: "The past quarter Q1 2017 the price changes on the stock market were quite low (low "VIX") which led to lower profits for Flow Traders. Theoretically, earnings should improve in the future. I don't understand their business or competitive advantage versus other companies."
Since then earnings have improved markedly and the price of the stock has gone up and down. Currently, Flow Traders and seems cheap, but is outside my circle of competence.

SECTOR: [???] Flow Traders provides liquidity for ETP Exchange Traded Products. It went public in 2015 at a price of around €35, the price climbed to €50 and now has dropped below the IPO level. I  am not an expert and don't know how much of an "arms race' in technology is involved.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Flow Traders' sales of €400  million ? passes this test.

LONG-TERM EPS GROWTH: [PASS]  Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Flow Trader's long term results are difficult to determine because of its corporate history and recent IPO. 

Earnings Yield:  [PASS]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Flow Trader's E/P of 10% (using a 3 year average Earnings) passes this test.

Graham Number value: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Flow Trader's has a Graham number of (15 x €2,9 EPS x 1,5 x €7,8 Book Value) = €22.4 

Note: Book value is less relevant for an information company like Flow Traders than a factory.

Dividend: €1.35/€26 = 5%  (Flow Trader's dividend varies. It pays out 50% of profit as dividend).

Conclusion: Flow Traders seems to be creating value and is a better buy near €25 than at €50, but is not a stock for the Defensive Investor. 

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