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)


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      


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.


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.



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)  


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.


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


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.



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


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.


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).


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.


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.


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

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