OPEX makes use of Nymex's (NMX) ClearPort clearing platform, which has seen average daily volume increase an average of 130% over the last three years. The ClearPort growth and stunning growth at Optionable stems from the increased interest in trading energy derivatives.
From the 30 January, 2007 press release:
"OPEX is a real-time electronic trade matching and brokerage system designed to improve liquidity and transparency in the energy derivatives market."
The rest of this report focuses on the company rather than the technical details of OPEX. More information on OPEX can be found on the Optionable, Inc. website.
I will be the first to admit that I could know more about the technology behind OPEX. This is why, when looking at Optionable, it is necessary to get a professional opinion about the prospects for company's OPEX trading platform. Fortunately, NYMEX just agreed to purchase a non-dilutive 19% stake in the company (they will purchase shares from the founders). In the company’s first conference call, management stated that NYMEX will also be issued warrants to purchase additional shares of the company, but no more than a total of 40% of all shares outstanding. When the largest commodity exchange purchases a 19% stake and wants to work with Optionable to further develop OPEX, this serves as evidence to me that the technology holds significant promise.
This stock has gone from about $1 to over $6 in a matter of months but management has not sold, as far as I can tell, any shares on the open market. In fact, several executives have exercised options and held onto the shares. Even after the NYMEX agreement goes through, the top four executives will retain approximately a 26% stake in the company.
OPBL had earnings of $2.5M last quarter, up from $2.2M in the previous quarter. That is 13% sequential growth. Annualized (without compounding) that's 52% earnings growth. If we assume $2.5M per quarter for the next 3 quarters, that would put earnings at $10M per year. The P/E would be 34. There are a lot of assumptions baked into these numbers. And for many people, you will be in disbelief when I say I believe these numbers are conservative. The P/E of 34, for instance, assumes no further earnings growth, but we know that the industry is booming.
Now I am going to go out on a limb and suggest that there are reasons earnings growth will accelerate. Optionable already has phone and open-outcry brokering operations. OPEX trades have higher margins and existing customers have and will continue to make use of OPEX, which will boost the company’s margins. If OPEX is as good as the NYMEX agreement indicates, OPEX should attract first-time customers also. In summary, Optionable should continue to see growing sales and margins.
When OPEX contributes to Optionable's bottom line for several quarters, analysts will see that the growth is sustainable and it will be easier to extrapolate future growth rates. This could lead to P/E expansion (or contraction if you're a pessimist).
Other Value Considerations
Management owns a lot of this company and that should be very meaningful to any potential investor. Also, NYMEX's stake is most important because it symbolizes a willingness to further develop OPEX. Optionable is aligning itself with the biggest commodity exchange; this will be extremely beneficial for the company in the future.
Optionable previously brokered trades on the floor of the NYMEX through a company called CES, which is a separate company owned by Optionable's CEO. OPBL announced that it is no longer using CES, which eliminates a conflict of interest. Going forward, the company will use an independent company to execute trades on the floor of the NYMEX.
OPBL was a very small company only a few months ago and has made an effort to eliminate some practices that aren’t considered appropriate for larger companies. I suspect that the increases in transparency are going to precede an application for listing on a major American exchange. This will attract more investors and potentially drive the price even higher.
No look at a company is complete without looking at the risks. OPBL is expected to grow very quickly and if it doesn't meet these expectations then we will see the stock price fall. I believe the biggest risk is a competing commodity exchange acquiring a company similar to OPBL, which will compete head-to-head. However, OPBL has NYMEX in its corner. So perhaps the worst case scenario is if NYMEX loses interest in OPBL and instead acquires a competitor. I will be looking out for the full agreement regarding the warrants and will pay attention to whether NYMEX cashes out, although I have always believed this was a strategic long term investment for NYMEX.
Potential investors must also consider that when NYMEX exercises its warrants there will be share dilution of roughly 20%.
Optionable is not a typical company. Its value lies in OPEX, its agreement with NYMEX, and its existing customer base that can be leveraged to drive revenue and margin growth. There is uncertainty regarding growth projections; this is undeniable. This is also not a typical company that we analyze either, but this is a great example of "value through growth." A solid underlying business model, promising technology, and management with "skin in the game" are the reasons I like OPBL.
Note: Unfortunately I couldn't write this article fast enough. OPBL is up 25% since I started writing this piece.
OPBL 1-yr chart
Disclosure: Author is long OPBL.OB.