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Investment Technology Group is Investment Worthy
Posted by: Dr. Paul Price (IP Logged)
Date: April 19, 2009 01:10PM

Investment Technology [NYSE:ITG]: April 19, 2009 - $21.99
52-week range: $13.00 (Nov. 21, 2008) - $53.35 (May 11, 2008)

*Investment Technology Group, Inc. (ITG) is a specialized agency brokerage and financial technology company that partners with asset managers globally to provide solutions spanning the investment field. ITG's integrated approach includes a range of products from portfolio management and pre-trade analysis to trade execution and post-trade evaluation. It has three segments. The U.S. Operations segment provides trading, trade order management, network connectivity and research services to institutional investors, plan sponsors, brokers, alternative investment funds and money managers. The Canadian Operations segment provides trading, network connectivity and research services. The International Operations segment includes the Company’s trading, trade order management, network connectivity and research service businesses in Europe, Australia, Hong Kong, Japan and Singapore. On July 30, 2008, the Company acquired the remaining 50% interest in POSIT Alert LLC (formerly Block Alert, LLC).

*Company description by MSN MoneyCentral

ITG is a market sensitive company. The higher the general volume of trading, the better the environment is for them. The slump in stock prices during 2008 and early 2009 put a dent in ITG’s earnings. Even so, full-year EPS for last year advanced from $2.48 to $2.61. Zacks now expects $1.69 and $2.16 for 2009 and 2010 assuming markets continue to be very subdued for the foreseeable future.

I’m a bit more sanguine than Zacks about a general market recovery and I wouldn’t be surprised to see better numbers than they are projecting. Even using their very conservative numbers ITG shares are now offered at 13x this year’s and 10.2x next year’s estimates. That’s way below their historical P/E levels.

Other metrics such as P/BV and P/CF also point out ITG shares as looking quite undervalued right now due to negative market psychology. The shares tumbled from about $28 to near $20 on April 8th when the company announced March volume was lower than expected and margins would be pinched. The estimates quoted above are the already reduced numbers from AFTER this announcement.

ITG’s balance sheet looks good. Total debt at YE 2008 was just 15% of capital. They held $353 million in cash against just $119.5 in total debt with only $25 million due in the next few years.

Here are the per share numbers as reported by Value Line:

………………………………………………………........…………………52-week
Year ….. Sales ….. C/F ….. EPS ….. B/V ….. Avg. P/E ...…Range
2003 …. 7.47 …… 1.38 …. 0.89 …. 8.08 …… 19.0x …10.90-24.70
2004 …. 7.97 …… 1.43 …. 0.95 …. 8.83 …… 15.5x …11.90-20.20
2005 …. 9.47 …… 1.93 …. 1.50 ….10.72 ….. 16.6x …16.60-40.90
2006 ….13.68 ….. 2.59 …. 2.05 ….13.88 ….. 22.6x …34.40-59.10
2007 ….16.82 ….. 3.04 …. 2.48 ….16.21 ….. 16.9x …35.40-48.70
2008 ….17.35 ….. 3.08 …. 2.61 ….18.21 ….. 14.8x …13.00-53.35

Investment Technology has been a terrific growth company. I’m taking advantage of this lull in the market and the huge drop in the share price to establish a position.


I think a look at the historical price/book value ratio gives a good answer to what ITG should sell for. Here is a chart showing the high and low annual shares prices and their P/BV levels during each of the past five years:

Year ……Share Low …….. P/BV ……. Share High ……. P/BV

2003 ……..10.90 ………… 1.34x ………..24.70 ……….. 3.06x
2004 ……. 11.90 ………….1.35x ………. 20.20 ……….. 2.29x
2005 ……. 16.60 ………….1.54x ………..40.90 …….... 3.81x
2006 ……..34.40 ………….2.48x ………..59.10 …….... 4.26x
2007 ……..35.40 ………… 2.18x ……… .48.70 ……….. 3.00x
2008 ……..13.00 ………… 0.71x ……… 53.35 ………... 2.93x

At the present quote of $21.99, ITG’s price/book value is now lower than the lowest ratios of any of the past six years excepting last November’s panic sell-off. Even 1.5x last year’s ending book value of $18.21 would bring ITG shares back to $27.31 or up 24% from here. This price target jibes closely with Morningstar’s ‘fair value’ estimate of $28 – a figure that reflects the most recent announcements concerning trading volume and margins.

I like Investment Technology shares for a minimum move back up to the $25 - $30 level over the next 6 – 12 months. Remember, they were $53.35 last May and $28 less than two weeks ago.

For truly risk averse investors that still want to play with ITG I present this six-month play:

………………………………........................……Cash Outlay ………… Cash Inflow
Buy 1000 ITG @$21.99 …….............……… $21,990
Sell 10 Oct. $22.50 calls @$3.40 ………………….............………….$3,400
Sell 10 Oct. $22.50 puts @$3.90 …………………...........…………...$3,900
Net Cash Out-of-Pocket ………............……. $14,690

If ITG shares have risen by 2.5% to > $22.50 by October 16th:

Your $22.50 calls will be exercised.
You will sell your shares for $22,500.
Your $22.50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.

You will then own no shares but hold $22,500 for your original
cash outlay of $14,690.

That’s a best-case scenario profit of $7,810 or + 53% cash-on-cash.

Not too bad for a six month hold on shares that only needed to
rise by 2.5% from the inception date of the trade.


What’s the risk?

If ITG shares stay under $22.50 through October 16th:

Your $22.50 calls will expire worthless.
Your $22.50 puts will be exercised.
You will be forced to buy an additional 1000 shares and to lay
out another $22,500 cash.
You will have no further option obligations.

You will then own 2000 shares of ITG.


What’s the break-even point on this trade?

On the first 1000 shares it’s the purchase price of $21.99 less
the $3.40/share call premium = $18.59/share.

On the puts it’s the $22.50 strike price less the
$3.90/share put premium = $18.60/share.

Your break-even price is the average of these virtually identical
prices or $18.60 /share.

ITG shares could drop by up to $3.39 or (-15.4%) from today’s price
without you suffering a loss.



Disclosure: Author is long ITG shares and short ITG options.


Stocks Discussed: ITG,
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Rating: 3.0/5 (4 votes)



Re: Investment Technology Group is Investment Worthy
Posted by: Dr. Paul Price (IP Logged)
Date: November 15, 2009 09:29PM



On the October 16th expiration date ITG closed at $27.15 /share.


The best-case scenario was achieved as the calls were exercised and the puts expired.


This resulted in a 53% cash-on-cash return for the six-month period (not annualized) as was
described in the write-up.



[www.BeatingBuffett.com]


Stocks Discussed: ITG,
Rate this post:

Rating: 3.0/5 (4 votes)





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