Posts tagged " financial services "

investment-technology-group-inc-itg

Investment Technology Group Inc (ITG) Has Negative Growth

November 25th, 2012 Posted by Investment Valuation No Comment yet

Investment Technology Group Inc (ITG) is a financial services company based in the United States.  ITG is a  multinational agency brokerage and financial markets technology and was founded in 1983.

ITG Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculated first the enterprise value as our first step. I believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ITG EV

Looking closer at the table above, the market capitalization for ITG decreased at a rate of 53 percent in 2008 and 24 percent average thereafter. Total debt represented 12 percent average, while cash and cash equivalent represented 42 percent average of the enterprise value. Thus, enterprise value was lesser by 30 percent against market value. buying the entire business of ITG will be paying 100 percent of its equity, Purchasing the entire business of  Investment Technology Group to date, November 12, 2012, will cost $75 at $1.92 per share. The current market price to date is $7.86 per share.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach   

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method      

ITG NCAVPS

The net asset current value approach indicates that the price of Investment Technology Group was overvalued because the market price was greater than the 66 percent ratio of NCAVPS. The stock price of ITG was expensive from 2007 until the trailing twelve months (6) 2012.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of VSEC passed the test.

  ITG MC NCAV

The MC/NCAV indicates that the stock price was overvalued from 2007 to 2012 because the ratio exceeded the 1.2 ratios. Hence, the price of Investment Technology Group was expensive and therefore, didn’t pass the stock test.

Benjamin Graham’s Margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

ITG MOS

Explanation

Benjamin Graham’s margin of safety indicates a 61 percent average for Investment Technology Group, while in the trailing twelve months (6) 2012 it has a margin of safety at 99 percent.  Intrinsic value was $144 average.

The formula: Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

wherein;

EPS: the company’s last 12-month earnings per share,  G: the company’s long-term (five years) sustainable growth estimate,  9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham  proposed an 8.5, but we changed it to 9), and 2: the average yield of high-grade corporate bonds.

ITG IV

Earnings per share (EPS) and the sustainable growth rate (SGR) factors intrinsic value.

EPS

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend-payout ratio.

    ITG SGR

Explanation

The average return on equity was -4.34, the ratio was negative because the ROE ratio for 2011 and the ttm6 was negative also due to negative net earnings during these periods. There was no payout ratio because the company is not paying cash dividends to its common shareholders.

There are also two approaches to calculating the sustainable growth rate. These are by using the relative ROE and the average ROE. Changes in approach also affect the results of intrinsic value and the margin of safety. To understand further, the results of these two approaches were summarized in the table below.

ITG Relative

Explanation

The intrinsic value line dropped in 2009 at a rate of 82 percent and started to rise again in 2010 at 57 percent. Then it continued to soar up very high in 2011 and the ttm9 2012 at a rate of 1947 percent and 175 percent, respectively. The financials of ITG showed zero earning from 2008 until 2011 and during the ttm6 2012, its net earnings were -57 percent.  This is the reason why in ttm6 the IV line soared up very high because the loss was great. On the other hand, EV line was deteriorating in value at a rate of 37 percent average.

ITG Graph

For the Investment Technology Group, there was a zero margin of safety during 2010 because EV line was higher than the IV line. Converting the space in value or in percentage, we get an average of 61 percent and this is the margin of safety. MOS is the result of subtracting the intrinsic value against the enterprise value.

ITG Relative Valuation Methods  

Relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)   

This valuation will help us understand whether stocks are undervalued or overvalued. To get the answer, we simply multiply the price to earnings (P/E) ratio with the company’s relative earning per share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

ITG PE EPS

It indicates that the price was overvalued in 2007 because the enterprise value was greater than the P/E*EPS ratio. In 2008 to 2012, the price was undervalued because enterprise value was lesser than the P/E*EPS ratio. The enterprise value was 74 percent average of the P/E*EPS ratio. Overall, the P/E*EPS valuation indicates that the Investment Technology Group price was cheap.

The Relative and Average Approach

Another approach in calculating this ratio is by using the average price to earnings ratio.

ITG Relative PE

The relative ratio approach for ITG has a lower price to earnings ratio than the average price to earnings ratio. The average percentage for P/E*EPS in 2011 was -1427 percent. This is the reason why the percentage in the average approach was negative.

The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)      

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E). And the difference represents the earnings (EPS).

ITG EV EPS

The EV/EPS valuation method indicates that the price (P/E) was 57 percent and the earnings (EPS) was 43 percent average. This indicates that the price was overvalued because the ratio was more than 50 percent.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

   ITG EV EBITDA

The average result for EV/EBITDA was 8 years or 8 times. Meaning, it will take 8 times the cash earnings of ITG to cover the costs of buying the entire business. and considered a long period of waiting. This valuation also indicates the profitability of the company. Since 8 years is a long period, digging into the financials of ITG, its net earnings were negative 20 percent. Investment Technology Group suffered losses from 2008 until ttm6 2012. So, ITG is unprofitable.

Conclusion

Overall, the stock price of ITG was overvalued or expensive. The growth was negative which shows that ITG is unprofitable. Therefore, I recommend a SELL in the stock of Investment Technology Group.

Researched and Written by Cris

knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Is Highly Leveraged

September 17th, 2012 Posted by Company Research Report No Comment yet

Knight Capital Group Inc (KCG) was an American global financial services firm engaging in market making, electronic execution, and institutional sales and trading. Source: WikiPedia

Knight Capital Group Inc (KCG) Balance Sheet

The balance sheet allows us to see how much a company owes (liabilities)and how much it owns (assets). To keep things in balance between assets and liabilities, we have retained earnings (equity). I evaluated the following key indicator like financial liquidity, leverage, among who had majority control and asset management.

Financial Liquidity

Financial liquidity is to determine the ability to pay short-term debt accounts payable that can be converted quickly to cash. Commonly used liquidity ratios include the current ratio, working capital ratio, and net working capital. The current ratio is an indicator of a company’s short-term liquidity; which divides current assets by current liabilities. In addition, the working capital ratio is used as a barometer to measure a company’s over health and liquidity; which is current assets less current liabilities divided by total assets. Networking capital indicates the ratio or percentage of working capital against total assets.

KCG financial liquidity

Explanation

Financial liquidity ideal results were equivalent to 1 or 100 percent or more. KCG based on the graph had only a total average of 71 percent availability over their current liabilities. In other words, in every $1 of short-term debt, they had available assets of net working capital was declining, it was down to 20 percent based on 2008 results. It had an average of 5 percent means still they were are unable to meet the short-term debt.

Leverage

Leverage is the amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged. It is composed of debt ratio, debt to equity and solvency. The debt ratio is to determine how many total assets financed by borrowing funds, through the results of a current asset over current liabilities. Further, debt to equity ratio is the ratio of total shareholders’ equity financed by borrowing funds, from the result of total liabilities over the result of total stockholders’ equity. Furthermore, the solvency ratio measures a company’s ability to meet long-term obligations. Through the result of income after tax add the depreciation and divide to the result of current and long-term liabilities.

KCG leverage

Explanation

KCG leverage is too high in terms of the short term. The company finance from borrowed funds was equivalent to $.68 for every $1 of debt. Based on equity, it had an average of 213 percent financed by borrowed funds. It means that in every $1 of equity it was financed two times and it was too high. The ideal solvency result is 20 percent.

Majority in Control

In evaluating,  it is also important to consider who is in majority control of the company. To determine, it includes control from current liabilities to total assets which to identify how much will be claimed by the creditor against total assets of the company. On the other hand, long-term debt to total assets is to make out how much claim has the banks or the bondholder against its total assets. Then, stockholders’ equity to total assets is to know how much the owner can claim in its total assets.  Let us see the results for Knight Capital Group Inc.

KCG mjority control

Explanation

From the above results; if we based on their total five years of operation; the majority in control was the creditor holder at 33 percent, followed by the stockholder at 32 percent then last to bank/bondholder only at 6 percent. Though from the first three years, it was the stockholders it went down to 20 percent in 2011 compared to the creditor which rose up to 43 percent.

Asset Management

Asset management is composed of the following: total asset turnover, receivable turnover ratio, and payable ratio. When we speak of total asset turnover, it tells us the number of times that the assets turn per period, from the results of revenue over current assets. While receivable turnover ratio measures the number of days that companies collect its receivable or convert it into cash by using the result of outstanding receivable over its revenue for the period multiplied by 365 days. Then, the payable turnover ratio is to determine the number of days that the company pays its obligation to its suppliers from the outstanding accounts payable over its total cost of revenue multiplied by 365 days.

KCG Asset Management

Explanation

Based on the table above, KCG ’s five years of operation it showed that the company had a minimum of 167 days to convert their sales into cash. While in the total five years of operation, their minimum of the number of days to pay to its supplier were  529 days.

KCG Income Statement

The income statement is the bottom line result of the business for the period after deducting all the direct cost associated with its revenue and the operating expenses like admin and maintenance cost. Then, we can determine the net margins. Below are the results, in terms of their profitability, revenue, expenses and margin report for Knight Capital Group Inc.

Profitability

Profitability is a key measure for the business success; its composition of net margin ratio which defines as the net results after deducting all the expenses, from net income over revenue for the period. Asset turnover measures effectiveness how their assets easily convert to sales; through revenue over the total asset.  Return on assets or ROA tells us how much profit the company generated for each dollar of total assets by the result of net income over a total asset.

On the other hand, return on equity (ROE), using DuPont, measures the return of such profit percent for every dollar of equity. It can be determined using the result of the net profit margin multiplied by asset turnover. The financial structure ratio is the specific mixture of long–term debt and equity that a company uses to finance its operations. Further, the tax efficiency ratio measures how much profit left after deducting the income tax. It can be determined using the result of net income over profit before tax.

KCG Profitability Graph

KCG PROF2

Explanation

Did Knight Capital Group Inc. become profitable? The graph showed that KCG profitability within five years was in the positive result. It had a high net margin result in 2008 at 19 percent and went down from 2009 to 2011 to 8 percent a  total of $.12 generated per $1 of the sale. ROE had $0.03 generated in every $1 sale.

Revenue

Revenue is the source of income received from its normal business activities, usually from the sale of goods and services to customers. And gross profit is an income after deducting the associated cost directly from goods or services. In addition, operating income is the result after considering its operations and general expenses of the company. Moreover, income before tax is an income after deducting the taxes.

KCGRfinal new

Explanation

The revenue data and its graph imply that it was progressive except in 2010 which slow down by 1 percent. And the gross profit went continuously upward. In addition, the income before tax shows a declining trend from 2009 at 122 percent. However, recovered in 2011 by 20 percent.

Expenses

KCGENEW

Explanation

How did the expenses affect their margin? KCG expenses graph and table tell us that they have high expenses incurred in operating compared to the cost of revenue. This is no doubt since they are equity market makers and institutional brokerages. In other terms, they have lots of expenses probably in salaries and involved with research. Thus the business nature itself could define their expenses. The increase in operating expenses is not worrisome since the revenue result could justify and it was effective. It also showed that the percentage of operating expenses really affects the net margin.

Margins

The Margin determines how much can be generated in every $1 of the sale. It is composed of a gross profit margin. Further, the operating margin denotes how much percentage left after deducting the operating expenses. Furthermore, earnings before income tax or simply EBIT is the result of income before taxes. The net margin ratio or the equivalent percentage after applying all the expenses for that period.

KCG Margin Graph

KCG MARGINNEW

Explanation

Gross profit had generated a profit of $.79 over $1 on sale. And the operating margin and EBIT had the same result. The two both declined from 36 percent in 2009 and in 2010 down to 14 percent have an average $.21 generated in every $1. On the other hand, the net margin had a total average return at $.12 in every $1. It tells us they had a profitable result though in a declining trend.

KCG Cash Flow

Cash flow is a statement that helps in determining if the company has available cash for the operation alone. In other words, if they have a good free cash flow to maintain the maintenance of its resources. and if they had an excess of funds to refinance or cash available for business expansion.

Cash Flow Summary Graph

kcgfinal new

Explanation

The cash flow summary of KCG was in sideways. The cash flow from 2007 and 2008 was progressive with an equivalent of 36 and 57 percent. And then went down in 2009 and 2010 by 4 and -19 percent and went up by 22 percent in 2011. It tells us the management is recovering and efficient. In addition, the cash flow from investing in 2007 to 2009 had cash due to sales of mature investment.

Interpretation

Moreover, an outflow resulted due to the high cash used in the purchasing of PPE that purchases in investment. Financing had a reversed transaction from investing which from 2007 to 2009; it had an outflow of cash used for another financing. While, from 2010 and 2011 it had an inflow of cash due to long-term debt issued at 337 percent and change in short-term borrowing at 288 percent, respectively.

Cash Flow from Operating Graph

KCG new CFO

Explanation

Net operating cash flow had a negative result in 2010 due to the net income represented at 15 percent. Other asset and liabilities had a decreased of 84 percent. And also the increase of payables at 89 percent over their five years of operations.

  • Cash flow from operating ratio of sales measures how much cash generated from its revenue for the period.
  • And the operating cash flow ratio; by using the result of operating cash flow from operating over current liabilities;  measures how much cash left after considering short debt.
  • In addition, free cash ratios help us conclude if the company will grow in the future. Through the result of operating cash flow fewer, dividends paid less capital expenditure over operating cash flow.
  • Capital expenditure ratio measures company sustainability in maintaining their assets by using the result of operating cash flow over capital expenditure for the period.
  • Moreover, the total debt ratio is the result of operating cash flow over total liabilities. This measures the company’s efficiency.
  • Next, the current coverage ratio measures how much cash available after paying all its current debt.

knight capital group inc.

Explanation

Cash flow ratio results implied that based on the data and the movement showed. The operating cash flow of sales had an average of 11 percent In other words, $.11 generated in every $1 of sales. The operating cash flow ratio and the current coverage ratio was 269 percent in 2008. And went down to -26 percent in 2010; resulted in 80 percent average or $.80 cash available for every $1 of debt.

Interpretation

Free cash flow was not stable, fell down during 2009 due to fixed asset exceeded by -110 percent or $.57 in every $1. Capital expenditure was sufficient even though the company suffered -177 percent in 2010. It resulted in an average of 389 percent or $3.89 available cash over $1 of CAPEX maintenance. In addition, total debt ratio; through positive; was not sufficient with an average of $.09 for every $1 of debt.

Research and Written by Dyne

Edited by Cris

knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Rise and Fall

August 16th, 2012 Posted by Investment Valuation No Comment yet

Knight Capital Group Inc. (KCG) is based in Jersey City, NJ is a global financial services firm They provide access to the capital market across multiple asset classes to a broad network of clients. Including broker-dealers, institutions, and corporations. It started in 1990 as a market maker in equity securities. KCG recently ventured also into investment banking and asset management.

Please take note that this valuation was done for special events or issues that pop-up in the stock market recently. In which Knight’s trading loss of $440M shows cracks in equity markets.

KCG Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  On the other hand, market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ev

Explanation

The total debt represents a 21 percent average of enterprise value, while cash and cash equivalent represent 32 percent average of the enterprise value.  On the other hand, the enterprise value is lesser by 11 percent in market value due to its cash which is higher than total debt.  Likewise, buying the entire company an investor would be paying $1107 at $3 per share.  The distribution in buying would be as follows:

Operating assets – 100 percent  =  Equity – 100 percent 

Market capitalization is trending at 4, -1, -6, -14, and -13 percent from 2008 to 2012 TTM. Average of -6 percent. Enterprise value is trending at -8, -0.3, 12, -13 and -1 percent from 2008 to 2012 TTM. Average of -22 percent. Price dropped to 74 percent in the trailing twelve months.

Benjamin Graham’s Stock Test

Net Current Assets Value per Share (NCAVPS)

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share. Specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

knight capital group inc

Explanation

Market price was 74 percent average over the 66 percent of the NCAVPS. This means that the price was overvalued using market capitalization per share. This indicates that the stock of KCG was trading above its liquidation value from 2007 to 2012 trailing twelve months. Therefore, it did not pass the stock test of Benjamin Graham. In the trailing twelve months, the company’s net current asset value was negative since current liabilities is greater than current assets.

Market Capitalization/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

mc over ncav

The results above showed that the ratio was over 1.2 from 2007 to 2012 trailing twelve months, meaning the stock of KCG is trading at an overvalued price. Therefore the stock of KCG did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety

Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

The margin of Safety (MOS)

margin of safety

The margin of safety represents 73 percent average of the real value (intrinsic value) and the price represents 27 percent average of the real value. This showed that the price is undervalued by an average of 73 percent.

The formula for Intrinsic Value.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate). Then the results are:

iv

Explanation

  • The earning per share (EPS) in the trailing twelve months was adjusted from 1.10 to 0.increaseincreasing in the number of shares of 260 shares, totaling to 355 shares (95 + 260) for TTM. The intrinsic value was then recalculated which resulted in a decrease in value by $16. (from $28 to $12).
  • In addition, calculation for EPS was: Basic Earning per Share = Net Income / Weighted average number of shares wherein,                   
    •  Net Income – $104 
    • Weighted Average # of shares = 95 + (95+260) = 95 + 355 = 450/2 = 225
    • Basic Earning per Share = $104/225 = $0.46
  • Moreover, the enterprise value per share represents 32 percent  average of the intrinsic value. It means the price was undervalued by 68 percent against the true value of the stock.    

Annual Growth Rate (SGR)

 annual growth rate

Intrinsic Value Graph

iv graph

The graph shows that the intrinsic value was greater than the price by 68 percent average, therefore, the price was trading at the undervalued price. Meaning the price was cheap.

The Relative and Average Ratio

Considering the growth of KCG from 2007 to 2012, I calculated the SGR using the relative ratio and the average ratio and compared the results.  It shows that intrinsic value and the margin of safety have higher results. The table below will show you the difference.

   

It shows that using the average ratio in calculating the growth of KCG, resulted in favorable intrinsic value and margin of safety. The result is the average for 5 years.

KCG Relative Value Method

Price to Earning*Earning per Share (P/E*EPS)

The concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

 pe x eps

The price was undervalued from 2007 to 2009, and it was fair value in 2010 and 2011. This is due to an adjustment in the earning per share (EPS) during the trailing twelve months for the increased in stocks by 260 shares.

Moreover, using the average price to earnings rather than the relative price to earnings shows a higher ratio. The table below shows the comparison between the two ratios:

Metrics Relative Ratio Average Ratio
Price to Earnings 61 avg 74 avg
P/E*EPS 8 avg 12 avg
% of EV over P/E*EPS 43% avg 46% avg

With this comparison, we consider the company’s growth from its five years of operation, the results were greater than 8 and 6 percent of the price to earnings and P/E*EPS, respectively.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate price and earnings in enterprise value. And by dividing the enterprise value to projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

  ev over eps

The table showed that Price (P/E) represents an average of 81 percent; while earnings (EPS) represents 19 percent average.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

  ev over ebitda

This means that it will take 4 times of earnings of the company to cover the cost of buying or in other words, an investor will wait four years to cover the costs of the purchase price.

Conclusion

The stock price was trading at an overvalued price when pertaining to the results of Graham’s valuation method. Which are the NCAVPS and the MV/NCAV valuation. As a result;t, the stock was trading above the liquidation value of the company. Therefore, it did not pass the stock test of Benjamin Graham.

The margin of |Safety (MOS)

The margin of safety indicates that the price was undervalued by an average of 68 percent. In the trailing twelve months, the price was undervalued by 75 percent. In other words, the price was cheap.Using the average ratio in calculating the sustainable growth rate, the intrinsic value and the margin of safety represents 42.5 and 72 percent, respectively against 40.66 and 68 percent using the relative ratio.

Relative Valuation

The relative valuation method shows that the price was undervalued from 2007 to 2009. Moreover, the earning per share (EPS) decreased to $0.46 from $1.10. Due to an additional 260 shares totaled to 355 shares in the trailing twelve months. While the EV/EPS showed an overvalued price because the price represents 81 percent. And the earnings represent 15 percent of the enterprise value. In TTM, the price is 100 percent and 0 percent earnings due to the adjusted EPS.

Cost of Buying

Buying the entire business of KCG, an investor will wait 4 years to cover the costs of buying. In other terms, it will take 4 times the earnings of the Knight to cover the purchase price. Price to date, 8/15/2012 was $2.99 at $301.0 market capitalization.

Overview

The stock was trading above the liquidation value of KCG, in other words, the stock was overvalued. And the stocks did not pass the stock test of Benjamin Graham. The margin of safety indicates a 77 percent average and in the trailing twelve months. Moreover, it has a 75 percent margin of safety, meaning the price was cheap at $2.99 per share. On the other hand, relative valuation shows an overvalued price for P/E*EPS. And the EV/EPS valuation. Because the price represents 81 percent. 

Above all,

There was a margin of safety of 75 percent in the trailing twelve months meaning, the price is considered cheap at $2.99 per share.  Further, Graham would take the opportunity to buy stocks if the price was lower by 50 percent of the intrinsic value. Thus he considers the stock trading at a discount price. So, I recommend a BUY in the stock of Knight Capital Group Inc (KCG).

Researched and written by Criselda

Note:

Research Reports can be found under the company tab.