According to Yahoo Finance's Key Stats page and other financial websites, FXCM Inc. (FXCM) currently has a market cap of ~$305 million and enterprise value of ~$225 million. Trailing 12 months EBITDA was ~$85 million, indicating that the EV/EBITDA multiple is a low 2.65 times, sufficiently low enough to appear at first glance as an undervalued company.
When one digs deeper, however, they should notice that Yahoo and other financial websites are using the number of Class A shares outstanding mentioned at the top of FXCM's latest 10-Q of ~34 million. In reality, however, when FXCM went public in December 2011 it also modified its capital structure "by reclassifying the interests currently held by our existing owners into a single new class of units that we refer to as 'Holdings Units.'" These Holding Units "…will have the right, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis…"
In reality, the ~34 million of shares outstanding mentioned on Yahoo's Key Stats page only represent the number of Class A shares currently outstanding. It excludes the Holdings Units, which can be converted into Class A shares at any moment.
As per the latest 10-Q, for example:
During the three and six months ended June 30, 2012, certain members of Holdings exchanged 3.8 million and 9.1 million of their Holding Units, on a one-for-one basis, for shares of Class A common stock of the corporation under the exchange agreement.
Accountants recognize the dilutive nature of these Holdings Units and account for them when calculating the adjusted pro forma net income per fully exchanged, fully diluted shares outstanding. They list the number of pro forma fully exchanged, fully diluted shares outstanding as 72.848 million shares.
When calculating market cap and enterprise value, one should also take these dilutive shares into account. That would make the current market cap at $9.00/share $655 million, and enterprise value $573 million. Now when you calculate EV/EBITDA the multiple is 6.75 times, which is much more reasonable than the 2.65 times that Yahoo presents.
Situations like these are not frequent, but it is worthwhile when researching any investment to get a complete understanding of the situation. This includes double checking for potential dilutive situations, such as options/warrants, convertible debt/preferreds, and any other classes of shares with special conversion preferences.
In this article, I simply wanted to point out this issue as some investors may be confused as to why FXCM appears to be trading at such a low multiple. I am neither bullish nor bearish on the company as an investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.