BGC Partners (BGCP) is a unique financial firm with a diversified revenue stream. BGCP is a financial brokerage firm in third-party markets; a commercial real estate broker for sales, lease, and operational property management; has substantial cash along with investments in exchange-operator Nasdaq (NDAQ).
BGCP Financial Services offers brokerage facilities to institutions and banks. These include trade execution, clearing, and broker-dealer services. As major banks continue to withdraw from proprietary trading and as financial product structures become more complex, BGCP’s services will be more valuable.
Real Estate Services include commercial real estate sales services, leasing and property management, along with consulting and advisory services. BGCP’s major brand is Grubb Knight Frank, Newmark, Cornish & Carey.
Revenues for the 2nd qtr 2016 totaled $652 million. Sales were generated 60% in North America, 32% in Europe, Middle East and 8% in Asia, and were generated by the following areas:
Financial Services:
Interest Rates, Credit, F/X services 42%.
Energy, Equities, Commodities trading 18%
Real Estate:
Leasing, property management 26%
Capital markets 13%
BGCP owns about $850 million in Nasdaq stock, payable over the next 15 years. A few years ago, BGCP sold an electronic trading platform for cash and stock to Nasdaq with a multiple year payout. BGCP is expected to receive approximately $50 million a year in Nasdaq stock. This asset is not on BGCP’s current balance sheet
In addition, the company has cash on hand of about $450 million and an equal amount of non-Nasdaq investments. Total debt as of the most recent quarter is $1.1 billion, and is comfortably covered by current cash and investments of $900 million.
BGCP is co-managed by financial powerhouse Cantor Fitzgerald, with some top executives overlapping responsibilities. For example, Howard Lutnick is CEO of both firms. Investors need to appreciate that BGCP stock is used as a compensation tool for management, and is one reason the dividend is quite high.
BGCP pays an annualized dividend of $0.64 for a 7.22% qualified dividend yield. Many stocks with this level of income are more complex MLPs or could be non-qualified dividend payers such as REITs or some preferreds. BGCP’s next ex-dividend date is just around the corner on Aug 16.
BGCP may offer a clear upside based on valuation. Updating last fall’s valuation matrix offered by Nat Stewart, Opus Cap Management, BGCP could be worth as follows:
A) Financial Services: Voice/Hybrid financial services and Electronic trading generated $300 million in annualized 2nd qtr pre-tax earnings x 15 times = $9.04 per share.
B) Real Estate Services: $100 million pre-tax earnings x 11 times = $2.50 per share.
C) $850 million of future Nasdaq stock = $1.92 per share.
D) Corporate net debt ($900 million liquidity minus $1,100 million total debt) = -(0.50) per share.
The sum of these parts equates to $12.98 a share, or about $4.11 above the current price of $8.87.
Adding this 45% potential undervaluation to a 7.22% current yield should gain the attention of most small cap and income investors.
I have been buying BGCP for a combination of income and capital gains potential. I feel comfortable with both from a long-term perspective.
This article first appeared in the Aug issue of Guiding Mast Investments. Thanks for your time and interest. George Fisher