CMC Markets (LSE: CMCX) is a UK-based financial services company. It offers a trading platform for spread betting and contract for differences (CFD) trading across a range of markets and assets. The use of leverage does heighten the risk of these types of strategies, so it’s not necessarily for everyone. But it interests me.
The company is a constituent of the FTSE 250, with a current market value of a touch above £750m. It’s larger competitor, IG Group, is perhaps the better-known company.
But it was the breaking news on Saturday that caught my eye. Let’s take a look at what’s going on with CMC Markets, and see if there’s a buying opportunity for my portfolio.
Sky was the first to break the news on CMC Markets over the weekend. The announcement revealed a surprise potential break-up of the company. The split would create a spread betting and leveraged trading business, while the other half would house its technology platform and any further investment products it develops.
According to the Sky News article, the valued of the break-up would be £800m, so above the market value of £750m as of Friday’s market close.
There’s one important element of the deal that makes this interesting to me. Current CEO Peter Cruddas seems to be the architect behind the potential split. Sky News says Cruddas, who’s also a member of the House of Lords, is working with the board to reorganise the company. Lord Cruddas is a 62.5% owner of CMCX, and therefore should have his own interests fully aligned with shareholders.
For this reason, I think this could be constructive for shareholder wealth, and it’s why I’m considering buying the shares.
But before I buy shares in any business, I want a good understanding of the financials.
The company had a bumper 12 months to March 2021. Revenue grew 55%, and earnings soared an even better 105%. But it’s easy to understand why, given that CMCX provides trading solutions. This was a year of extreme market volatility, so its profits rose due to heightened trading activity.
Forecasts for this year, then, aren’t so great. Revenue is expected to decline by 43%, and earnings are set to plunge 62%. Again, it’s not surprising as markets have been much less volatile this year. It’s just the nature of CMCX’s business.
The shares are still attractively valued, in my view. On a price-to-earnings basis, they’re trading on a multiple of 11. The operating profit margin is an excellent 35%, with a cash flow yield of 12%.
Were I to buy any shares, I’d have to be content with its business model.
The breaking news over the weekend certainly piqued my interest in CMCX. Though in the past, I’ve avoided the sector as there’s always the risk that regulators tighten the use of leveraged trading products.
At time of writing, I do expect the shares to pop when the market opens on Monday, so maybe my chance of buying has gone. I’m going to place the stock on my watchlist to see how things develop.
Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.