Virtu 2Q20 schedule and value thoughts ?3

17:49 08-Jul-20

BGC has priced its 5 year notes at 4.375%.  This represents a 750 basis point improvement over the notes being refinanced, and it could help clear the way for other purchases.  Otherwise the rate is nothing to write home about, though.  If anything, it affirms my viewpoint that no game-changing sale of any of the businesses is coming soon.  If such a thing were in the works, it would have been better to wait for it and then try for a better rate.

While we're at it, I'll also document that MagnaChip has scheduled its second quarter report after the close on July 30th.  On average analysts expect 7 cents of EPS from $119 of revenue, increasing to $129M this quarter.  I'll monitor the report but only write about it if there is some reason to update the industry outlook given with the Himax preliminary results.

Virtu Financial has scheduled its second quarter report for the morning of August 7th.  Average analyst estimates call for $1.47 of EPS from $600M of revenue, declining to a more normal $364M level this quarter.

To my eye, these estimates are just one more lens on how the market is slow to adjust to the new reality.  The trend I cited here has continued, with Nasdaq volumes exceeding pre-pandemic levels by a third, whereas S&P500 volumes are closer to 10% higher.  The U.S. is set to pass 3M cases with Brazil and India in second and third.  Both American and global new daily case counts are at all-time highs.  Despite news fatigue, there is more volatility to come, in addition to the MemX opening.  Though VIRT has traded higher in recent days, I still see it as well below fair value and headed toward $30.

In such a dangerous market environment, I've been discussing BGCP & CVA with many subscribers over the past month or two, especially in light of recent declines.  Not much has changed for BGCP.  I've been clear and consistent in saying from the beginning that the shares are undervalued, but the dividend isn't coming back anytime soon.  I also think that any deal that might unlock value will still take several months, though some disagree with that.  We'll get another reading on the long term value soon, when we see how the new senior notes price.

Covanta is more impacted by the quickly changing energy markets, though.  When the dividend was cut, I said that shares should trade around the $7.50 strike, and that I would see $5 as the lower limit of volatility, at which to buy the stock.  Instead the stock has pushed the upper limit of that same volatility.  

Additionally, the landfill to RNG developments that I've discussed with Xebec and in Golar's Galileo announcement on Monday also represents long-term competition to Covanta's model.  Another such data point emerged this morning as Chevron hooks up with Clean Energy on RNG.  Once again, I think this benefits Xebec most over the long term, though I would not necessarily chase shares at current prices.  Currently, Covanta is focusing on the U.K. and other island nations where space is at a premium and thus landfills still won't be competitive, but where space is plentiful, the approach should wind up being more attractive than Covanta's incineration business.

COVID has really changed the world in some subtle but lasting ways, and reduced energy demand is one of them.  CVA looks like the opposite of BGCP, with the market pricing in long term value without considering short term challenges, and I see CVA as very dangerous at current prices, even though it is only overpriced by about 10-15%.  I don't see long term value as having much chance at being sustainably priced until after the election, when we can start to get a read on the collapsing globalism versus localized efforts toward quality models.

Thus, though telecommunications remains my industry of greatest interest, we won't know whether or not Nokia's push toward openness will succeed until then.  The rumor is that the company is about to lose its spot with Verizon, which would be no surprise since that company is as about as closed as they come.  So instead, I'll continue to hold some CTL and monitor but not own UNIT, even as Nokia upgrades its former parent and still main tenant.  I also want no part of the wild run in VUZI shares as it barely delivers its defense prototypes on schedule.  The market is being driven by Fed money and short squeezes, but that won't last forever.  Though I still patiently hold BGCP shares, I see VIRT as the best investment vehicle for riding out these conditions.  I'll continue to monitor many others but don't have the time write about those which I don't see as opportunities.  Invest carefully.