Penson Worldwide: Temporary Weakness Presents Opportunity

Dec.17.09 | About: Penson Worldwide, (PNSN)

Penson Worldwide, Inc. (OTC:PNSN) provides various critical securities and futures processing infrastructure products and services to the financial services industry. They offer trade execution, clearing and custody, trade settlement, technology, risk management, customer account processing, and data processing; and financing and cash management technology. Penson also participates in margin lending, securities lending, and borrowing transactions, primarily to facilitate clearing activities and proprietary trading. They also offer tools and services to support trading in multiple markets, asset classes, and currencies. It serves online, direct access, and traditional retail brokers, as well as banks, institutional brokers, financial technology companies, and securities exchanges in the United States, Canada, Europe, and Asia. Penson Worldwide, Inc. was founded in 1995 and is headquartered in Dallas, Texas.

Penson came public in 2006 and has remained solidly profitable despite the market meltdown of 2008 – 2009. Earnings have suffered due to the much lower net interest income caused by the Fed’s move to near zero short-term interest rates. Once rates begin to rise again (not too far away in my view) profits should expand rapidly and the share price may well surge back towards historical valuations.

Here are Penson’s per share numbers (from continuing operations) as reported in the company’s 2008 annual report:

Year

Sales

EPS

B/V

P/BV Range

Avg. P/E

52-week Range

2005

N/A

0.16

N/A

N/A

N/A

N/A

2006

11.47

1.05

8.45

1.8x-3.3x

19.1x

15.34 – 28.08

2007

15.85

1.26

10.39

1.3x-3.4x

17.6x

13.46 – 34.91

2008*

15.23

1.16

10.49

0.45x-1.8x

10.4x

4.71 – 19.36

* 2008 EPS excludes a $0.69/share non-recurring write off from a customer receivable.

Click to enlarge

The Q4 2008 write-off was the result of fraudulent activities of a client firm. Penson has implemented new risk-management procedures to ensure this does not recur.

Earnings for 2009 are expected to come in around $0.62 /share before rebounding to about $0.83 /share in 2010. At yesterday’s close of $8.65 that puts the multiple at 14x this year’s depressed earnings and < 10.5x 2010’s expectations.

When times were more normal PNSN shares typically fluctuated between 1.5x and 3x book value during the course of a calendar year. As of September 30, 2009 book value had grown to $11.51 /share. A rebound to even 1.5x book value would bring these shares back to $17.26 or almost double today’s quote.

Is that a reasonable target price? Why not? Penson shares changed hands at highs of $28.08, $34.91 and $19.36 in 2006, 2007 and 2008. In fact, the dead lows I 2006 and 2007 were $15.34 and $13.46 respectively. PNSN has traded as high as $12.23 already in 2009.

While revenues and earnings will take some time to regain their ‘boom times’ levels, it won’t require a full rebound to make a nice profit from today’s sub-$9 share price. The easy year-over year comparisons starting with the next quarterly report may be all that is needed to get these shares moving up again.

Disclosure: Author is long PNSN shares and short PNSN puts.