FXCM, Inc.: A Small Cap Name With a Big Cap Future

| About: FXCM Inc. (FXCM)

Recently an article was posted on SeekingAlpha that discussed FXCM, Inc. (NYSE:FXCM).

FXCM is an online provider of foreign exchange trading and related services. The company offers access to over-the-counter FX markets through a proprietary technology platform. The platform offers price quotations on up to 56 f/x currency pairs from up to 25 global banks, financial institutions and market makers, or FX market makers, allowing customers to trade f/x.

FXCM utilizes agency execution which means that when a customer executes a trade on the best price quotation offered by FXCM’s market makers, the company simultaneously enters into offsetting trades with both the customer and the FX market maker and does not act as a principal.

The article referenced above provided a quick overview of FXCM citing the cash balance, dividend yield, and low earnings multiple as evidence that the company is inexpensive. While I agree with the conclusion, the investment thesis is much more complicated and requires further commentary. Importantly, the author cited a market capitalization from yahoo finance of $180mm, which is incorrect.

The market capitalization was incorrect because many of financial data sources like yahoo finance only look at the basic share count when calculating market capitalizations. But for many companies the share structure is more complicated. In the case of FXCM there is a dual class structure and Holding Units that can be converted into class A shares. As a result instead of a share count of 17mm shares, the market capitalization of FXCM should be calculated using 77.6mm shares (the structure is well document in the IPO prospectus).

The actual market capitalization at the current stock price of approximately $11.00 per share is approximately $850mm and the enterprise value is $650mm. With $203mm of cash on its balance sheet as of March 31, 2011, the company has over $2.60 per share in cash. The company generated $80mm in free cash flow in 2010 for a free cash flow yield of almost 10%. Wall Street consensus cash flow per share for 2011 and 2012 are $1.02 and $1.47, respectively. This implies that by the end of 2012 FXCM will have approximately $5 per share of cash, almost 50% of their current share price. In actuality they will use this cash along the way to fund their $0.06 per share dividend and to buy back shares. In May the company announced a $30mm share repurchase authorization.

There are also significant risks to the FXCM story. It relies on the volume of f/x trading and generates more revenue in periods of f/x volatility. Before investing I would highly suggest reviewing the filings paying special attention to the risk factors. Happy hunting.

Disclosure: I am long FXCM.

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