Rating Update: Stock Rating B-Positive (10/8/19)-GAIN Capital Holdings Inc (GCAP).

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BUSINESS

GAIN Capital Holdings, Inc., together with its subsidiary, provides trading services and solutions to retail, institutional, and futures service customers worldwide. The company operates in three segments: Retail, Institutional, and Futures. It specializes in over-the-counter (OTC) and exchange-traded markets. The company offers access to a range of financial products, including spot foreign exchange (forex) and precious metals trading; and spread bets and contracts for differences on currencies, commodities, indices, individual equities, bonds, options, and interest rate products, as well as OTC options on forex. It provides services to retail customers through FOREX.com and Cityindex.com, as well as through brokers and white label partners.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, GCAP is expected to continue to be a modest Value Builder.

GAIN Cap Holdings has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. GAIN Cap Holdings has a very high Appreciation Score of 87 but a slightly negative Power Rating of 35, with the Positive Value Trend Rating the result.

GAIN Cap Holdings’ stock is selling well below targeted value. The current stock price of $4.50 compares to targeted value 12 months forward of $13.
GAIN Cap Holdings’ very high appreciation potential results in an appreciation score of 87 (only 13% of the universe has greater appreciation potential.)
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GAIN Cap Holdings has a Power Rating of 35. (This slightly negative Power Rating indicates that GCAP’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been unfavorable; and is in a slightly weakened position current. An offsetting factor is the recent trend in GCAP’s earnings estimates has been extremely favorable.

INVESTMENT PROFILE

GCAP’s financial strength is above average. Financial strength rating is 68.
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Relative to the S&P 500 Composite, GAIN Capital Holdings Inc has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that GCAP is normal risk. Low stock price volatility is a positive for GCAP. Relative weaknesses include: low historical profitability, low historical growth, and high earnings variability. GCAP’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. GCAP has unusually low market capitalization.

CURRENT SIGNALS

GAIN Cap Holdings’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

GAIN Cap Holdings’ current technical position is mixed. The stock price is in a 3.5 month up move. The stock has appreciated 46.4% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Important negative changes in GAIN Capital Holdings Inc (NYSE: GCAP) investment behavior have recently occurred: negative upside/downside volume developed.
Recent marginal negative changes in fundamentals have affected GAIN Capital Holdings Inc (NYSE: GCAP): significant quarterly earnings deceleration occurred.
The stock is currently rated B.
GAIN Capital Holdings Inc (NYSE: GCAP) stock closed at $1.19 on 10/8/19 after a major decline of -35.7%. This decline was accompanied by normal trading volume. Relative to the market the stock has been extremely weak over the last nine months and has declined -14.8% during the last week.

CASH FLOW

In 2018, GAIN Cap Holdings experienced a slight decrease in cash of -$67.19 million (-6%). Sources of cash were slightly lower than uses. Cash generated from 2018 EBITDA totalled +$87.59 million. Non-operating uses consumed -$2.61 million (-3% of EBITDA). Cash taxes consumed -$8.51 million (-10% of EBITDA). Re-investment in the business amounted to -$112.93 million (-129% of EBITDA). On a net basis, debt investors received -$15.51 million (-18% of EBITDA) while equity investors removed -$15.21 million (-17% of EBITDA).
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GAIN Cap Holdings’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Gain Capital Holdings Inc Peer Group. In most years, GAIN Cap Holdings was in the third quartile and second quartile. Currently, GAIN Cap Holdings is slightly below median at -3% of EBITDA (-$2.61 million).

GAIN Cap Holdings’ Cash Taxes, %EBITDA enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Gain Capital Holdings Inc Peer Group. In most years, GAIN Cap Holdings was in the top quartile and lower quartile. Currently, GAIN Cap Holdings is below median at -10% of EBITDA (-$8.51 million).

GAIN Cap Holdings’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Gain Capital Holdings Inc Peer Group. (Since 2012 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, GAIN Cap Holdings was in the top quartile and second quartile. Currently, GAIN Cap Holdings is below median at -129% of EBITDA (-$112.93 million).

GAIN Cap Holdings’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Gain Capital Holdings Inc Peer Group. (Since 2015 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, GAIN Cap Holdings was in the third quartile and top quartile. Currently, GAIN Cap Holdings is substantially below median at -18% of EBITDA (-$15.51 million).

GAIN Cap Holdings’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gain Capital Holdings Inc Peer Group. In most years, GAIN Cap Holdings was in the second quartile and top quartile. Currently, GAIN Cap Holdings is above median at -17% of EBITDA (-$15.21 million).

GAIN Cap Holdings’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gain Capital Holdings Inc Peer Group. (Since 2015 Change in Cash, %EBITDA has accelerated very sharply.) In most years, GAIN Cap Holdings was in the top quartile. Currently, GAIN Cap Holdings is lower quartile at -77% of EBITDA (-$67.19 million).
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GAIN Cap Holdings’ Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Gain Capital Holdings Inc Peer Group. (Since 2012 Cash, %Revenue has decelerated very sharply.) In most years, GAIN Cap Holdings was in the top quartile. Currently, GAIN Cap Holdings is upper quartile at +316%.

PROFITABILITY

GCAP’s return on equity reached a new post-2010 low in 2019.
GCAP’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of GCAP’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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GCAP’s return on equity is lower quartile (-7.0%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-1.6%) reflecting asset turnover that is slightly below median (0.22X) and lower quartile pretax margin (-7.3%).
Tax “keep” rate (income tax management) is at median (88.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is above median (4.96X).

GROWTH RATES

There are no significant differences between GAIN Capital Holdings’ longer term growth and growth in recent years.
GAIN Capital Holdings’ historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -4.9% per year.

Total asset growth has been 0.8% per year. (More recently it has been 11.0%.)

Annual E.P.S. growth has been -3.5% per year.

Equity growth has been 5.3% per year.
No consensus growth rate forecast is available for GAIN Capital Holdings.
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Relative to the Gain Capital Holdings Inc Peer Group, GAIN Cap Holdings’ historical growth measures are erratic. E.P.S. growth (-3.5%) has been above median. Equity growth (5.3%) has been above median. Total asset growth (0.8%) has been below median. Revenue growth (-4.9%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, GAIN Capital Holdings’ stock price performance has been variable and significantly below market. Between June, 2011 and October, 2019, GAIN Capital Holdings’ stock price fell -34%; relative to the market, this was a -70% loss. Significant price moves during the period: 1) May, 2018 – May, 2019: -53%; 2) April, 2015 – October, 2016: -53%; and 3) December, 2012 – September, 2013: +208%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -15.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of -15.0% is below median relative to GAIN Capital Holdings Inc Peer Group.

Current 5-year total return performance of -0.6% is lower quartile relative to the S&P 500 Composite.
Through September, 2019, with lower quartile current 5-year total return of -0.6% relative to S&P 500 Composite, GAIN Cap Holdings’ total return performance is below median relative to GAIN Capital Holdings Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, GCAP’s overall valuation is quite high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/assets is unavailable. Price/earnings ratio is unavailable. Ratio of enterprise value/revenue is unavailable.
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VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, GCAP is expected to continue to be a modest Value Builder.
GAIN Capital Holdings’ current Price Target of $13 represents a +185% change from the current price of $4.50.
This very high appreciation potential results in an appreciation score of 87 (only 13% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 87, the moderately low Power Rating of 35 results in an Value Trend Rating of B.
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GAIN Capital Holdings’ current Price Target is $13 (+4% from the 2018 Target of $12 and +185% from the 10/08/19 price of $4.50). This plateau in the Target is the result of a +14% increase in the equity base and a -8% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
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PTR’s return on equity forecast is 7.4% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 23%.

PTR’s growth forecast is 8.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2013 low of 2%.

PTR’s cost of equity forecast is 6.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2010 peak of 9.7%.
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At GAIN Capital Holdings’ current price of $4.50, investors are placing a negative value of $-6 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 7.9% versus a cost of equity of 6.1%.
PTR’s 2020 Price Target of $13 is based on these forecasts and reflects an estimated value of existing assets of $8 and a value of future investments of $4.

About John Lafferty 49646 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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