The share price for StoneX Group Inc. (NASDAQ:SNEX) has not been that impressive in the last 12 months as the company has barely grown around 1%. The company released its last report on August 2, 2023, which showcased a fantastic growth rate for the bottom line at 37% YoY.
The momentum and growth were largely fueled by the improving interest-bearing positions the company has and the impact of decent transaction volumes being maintained. Going forward I think that SNEX will be able to keep up the pace and deliver impressive results. The market position it has is solid and I think the share price is appealing to buy at as well. Based on earnings alone, the company is trading at over a 10% discount to the rest of the sector, indicative of a strong margin of safety here in my opinion. To reiterate my stance on the company, I am rating SNEX a buy.
For SNEX the operations involve providing financial services to a global customer base as they aim to connect companies and organizations to a market ecosystem worldwide. Various segments in the company make up the operations, those being, Commercial, Institutional, Retail, and lastly Global Payments.
The first segment mostly focuses on providing risk management and various hedging products among physical trading too. The retail segment is where SNEX has its trading services and offers solutions to the global financial market. The company has managed to gather up a massive customer base of 450,000 clients worldwide which has resulted in the strong operating revenue growth rate the company has achieved over the years, 32% to be exact between 2003 and 2023.
Looking at the offerings closer of SNEX we see that it is split quite evenly among the 4 segments in the business. The institutional and retail and more risk-averse segments adhere to 46% of the operating revenues are coming from. The client base here is varied but can be described as fund managers, active retail traders, and other financial institutions.
Going forward there seems to be a variety of different growth drivers that are pushing SNEX forward right now. With rising interest rates the company may see less activity in terms of clients, but they are generating far stronger earnings on the client and asset base they have managed to amass over the years. Besides that, SNEX also generates a strong amount of revenue when the market volatility is high, which it has been in the last 12 months or a couple of years even. This further accentuates why the company could be a decent long-term buy as the valuation it has appeals to me.
From the last earnings call by SNEX, I think there are some comments by the CEO Sean O’Conner worth highlighting. The company had a solid quarter at face value, so getting a more in-depth view I think is important.
“Physical commodities revenues were up a strong 59% versus a year ago and up 50% versus the Q2 due to better results in ags and energy as well as the addition of CDI which was acquired in Q1 of this year. Securities revenues were up 76% although this is inflated due to the growth of much higher interest revenue in our fixed income business as a result of the Fed rate increases”.
Seeing momentum in several parts of the business I think is further adding fuel to the company and the potential buy case that it is right now. Even if the securities revenues are up 76% because of being inflated by higher interest rates it showcases the potential of the company still and the possibility of prolonged growth.
“Although the aggregate client float reduced 3% and now stands at an aggregate 7.7 billion. Their production and client float was realized on the FDIC sweep balances as larger retail securities clients moved into higher-yielding deposits. Versus the immediately preceding quarter, our interest earnings on our client float was down 11% and the aggregate client balances declined 10%”.
With the client balance down slightly as well, I think this quote highlights that the market conditions haven’t fully recovered yet either. There are still some worries about where to keep capital in this market environment but once interest rates go down I would expect volumes to start picking up once again and for SNEX to post client activity going up.
SNEX’s operational foundation, encompassing both market-making and financial structuring, hinges entirely upon the ongoing availability of market liquidity. This essential prerequisite is pivotal for maintaining a consistent influx of order flow and fostering robust demand for the array of derivative products offered by the company. Yet, in a landscape marked by a persistent uptick in interest rates, SNEX could confront challenges in compensating for any potential deficiency in order flow across various asset classes solely through rate swap activities. With higher interest rates remaining where they are, the market activity is likely to take a step backward and SNEX could be faced with some difficulties getting new customers and clients. My views on the interest rates are that they will remain around the 5% mark for the better part of 2024, before going down. Of course, it’s speculation, as betting on what the Fed will do is a fool’s game. Despite it being speculative it doesn’t negate the buy case for the company nor the high plausibility for prolonged elevated interest rates.
Market-making is a fundamental aspect of SNEX operations, involving the continual quoting of buy and sell prices for various financial instruments. By providing these bid and ask prices, the company facilitates trading and liquidity, enabling participants to swiftly execute transactions. Yet, within this process, there exists the inherent risk that counterparties might default on their obligations, impacting the seamless execution of trades.
SNEX has managed to prove itself very well over the last 12 months as the company has been growing revenues and with an ROE of nearly 20% the potential expansion for the company is strong, which could bring a larger asset base able to be leveraged into growing EPS. This I think can help generate a strong ROI for investors over the long term and is the reason for the buy rating I have. Higher interest rates have been very beneficial for the company and when they go lower I would expect higher client volumes and activity to help offset some of the lost earnings from that. As for the valuation of the business, I think something along the lines of a p/e of 8 – 9 is fair as it’s the same as the sector. Paying a bigger discount to the sector of course would make it more appealing, but the quality of the business is evident, resulting in the current valuation in my opinion. This creates a stable base of growth for SNEX and constitutes a buy in my opinion right now.