FXCM: Once the World’s Third Largest Forex Broker Offers Lucrative Upside Potential

Summary

-FXCM has already paid $94.5 million to Leucadia out of the $300 million emergency loan

-FXCM quarterly revenue seems to be stable around $60 million for the last two quarters

-FXCM has ample cash reserve to operate for more than three years at the current total expense level

-Recent insider buying caused an increase of 65% of the FXCM stock price in the last week

Company Overview

FXCM Inc (NYSE:FXCM) is an over-the-counter ((OTC)) foreign exchange broker that facilitates online Forex trading to retail and institutional traders. FXCM Inc is one of the handful of Forex brokers who are publicly traded.

Since its humble beginning in 1999, FXCM Inc has provided quality brokerage service to traders. As the popularity of online currency trading, increased in the 2000’s, FXCM Inc found itself to be in a lucrative position and fully leveraged the growth in the industry.

In January 2014, the European Central Bank cited FXCM Inc as the third largest foreign exchange broker in the world.

Swiss National Bank Almost Bankrupted FXCM in January 2015

While things were going well for FXCM Inc, on January 15,2015, the Swiss National Bank ((SNB)) decided to remove its self-imposed 1.2000 EUR/CHF floor. The Swiss National Bank pegged the EUR/CHF at 1.2000 back in 2011 and they gave no indication of removing the price floor in January 2015.

The foreign exchange market is a peculiar place, where brokers offer insane leverage to customers to lure them into trading with large position size, which in effect, help generate more revenue to the brokers from spreads.

A lot of international foreign exchange brokers offer up to 400:1 leverage to their customers. However, and thank god, because of the Dodd-Frank Wall Street Reform and Consumer Protection Act, US based brokers are not allowed to offer more than 50:1 leverage to their customers.

Since the Swiss National Bank kept the currency peg at 1.2000 for several years, most of FXCM Inc’s clients had long positions. When the price floor was removed, the price of EUR/CHF fell through the roof. Within hours, the price of EUR/CHF declined 30%.

Since most retail and institutional clients of FXCM Inc had leveraged positions, the flash crash pushed their losses over the margin requirements. Under normal circumstances, FXCM Inc would have closed the client positions, but things happened so fast that by the end of the day, clients owed around $225 million to FXCM Inc.

It wasn’t only FXCM Inc who suffered heavy losses due to the actions of the Swiss National Bank, a lot of other brokers also suffered. In fact, a number of large foreign exchange brokers had to declare insolvency.

However, the next day, on January 16, 2015, FXCM Inc secured a rescue package from Leucadia worth $300 million, which helped them stay afloat. In Q1 2015, FXCM Inc declared a net loss of $393.3 million, but survived the SNB misdemeanor.

FXCM Is Still In the Business

FXCM Revenue

Figure 1: FXCM In Revenue Has Gone Down Significantly Over the Last Two Quarters

Since the SNB flash crash the quarterly revenue of FXCM Inc has gone down significantly. Even compared to Q4 2010, the $59.58 million revenue in the last quarter represents a 22.6% decrease. Compared to $212 million in Q1 2015, it is down by 72.17%.

Although taking a major loss in Q1 almost put FXCM Inc out of business, the emergency loan support from Leucadia helped it to stay in business. Over the last two quarters, we can see that the top line has settled just below $60 million.

Provided that FXCM Inc use to be the third largest foreign exchange broker prior to the SNB led event, they have a solid business infrastructure in place to rebuild the business in the coming years.

In Q2 2015, just after FXCM Inc took a hit of around $393 million loss, the company made a $75.9 million in cash payments to Leucadia, bringing the total payment to $94.5 million.

FXCM_Cash_Exp

Figure 2: FXCM Inc Got Ample Liquidity

As of Q3 2015, FXCM Inc is still not profitable, but their net expense has gone down to $69.43 million a quarter, just $10 million above the top line. The good news is that FXCM Inc had almost $900 million in cash and equivalent by the end of Q3 2015, which means they have 13 quarters to get their acts together and become profitable again.

Insider Buying Triggered the Surge in Stock Price

FXCM_Price

Figure 3: FXCM Inc Stock Price Gained 65% Over the Last Week

Since December 13, 2015, FXCM Inc’s stock price has gained around 65%, as of December 18, it is trading at $8.81 per share, representing a 51.9% increase compared to last week.

Benzinga reported on December 16 that the recent spikes happened partly because of insider buying activities. When FXCM Inc member of the Board of Directors Ryan Silverman bought 21,000 shares of the FXCM’s stock at an average cost of $6.37 per share, it triggered the recent spikes.

Conclusion

We believe the last two quarter’s performance demonstrate the viability of FXCM Inc’s future. The company’s quarterly top line has bottomed around $60 million, and with the track record of being one of the most successful foreign exchange brokers, going forward, it can regain market share.

By paying $94 million back to Leucadia within a short time, the FXCM Inc management showed how well they can turn the table. Also, last week’s strong performance of FXMC Inc stock suggest the people who run the company, or at least a few of them, are very optimistic about the future.

We believe the stock is way undervalued compared to the growth prospects and long term investors should consider buying FXCM Inc stocks while it’s still on the ground floor.