IB Net Payout Yields Model

Another Look at FCStone

FCStone (FCSX) is a compelling story that fell off the face of the market in 2008. They went from reporting a $78M profit in the year that ended in August 2008 to being worth hardly more then $30M. This was largely due to a trading account hit of over $100M that put serious doubts into the future of this company. FCSX has also taken a big hit from greatly reduced interest income due to the swooning short term interest rates.

The need for risk management and hedging in the commodities sector has never been greater. Once FCSX gets past the issues created by the huge trading loss, I'd expect FCSX to regain its luster that saw the stock trade above $50 last year. The company has stayed afloat in this turbulent times without the need for dilutive financings. Somehow FCSX has been more impacted in the stock market then the major banks like Bank of America (BAC) and regional banks like BBT or STI. FCSX has no exposure to the mortgage or commercial real estate market. Yes, they were hit by one bad trading account, but they've shown no signs of systemic issues. The future of this company seems bright considering the prospects for this growing company that has bought 3 competitors in the last year. Consolidation of the sector will allow them to become a global leader with operations now in Australia, Brazil, and China. Brazil was actually an issue last quarter, but I'd expect a quick rebound this year with the rebound in commodities.

Also, the news from the Federal Govt looking to regulate the OTC derivatives markets is bullish for FCSX. Their 80% owernership of Agora-X is square in position to take advantage of this expanding market. See the home page for testimony by the CEO to the U.S. House of Representatives Committee on Agriculture concerning legislation to bring greater transparency and accountability to derivatives markets

From the 10K recently filed. Looks like the NASDAQ investment was roughly $7.5M for a 20% stake. NASDAQ recently completed that investment with the launch of Agora-X in December. That'd place the FCSX portion at roughly $30M. Based on the direction of the OTC markets this investment could eventually be worth more then value of FCSX currently.
  • Minority interest. On March 3, 2008, the Company executed an agreement with NASDAQ OMX Group, Inc. ("NASDAQ") in which NASDAQ contributed cash of approximately $5.0 million in exchange for preferred units in the Company's subsidiary, Agora-X, LLC ("Agora-X). The NASDAQ's initial interest associated with the preferred units is 13.33% ownership in Agora-X, and NASDAQ has agreed to contribute additional cash consideration, upon the completion of certain conditions, for a potential ownership interest of 20%.

Another point of view just as a second opinion to my thoughts. FCSX is considered a top sleeper stock by him.

Needham Asset Management's Bernard Lirola – 5/7/09

Lirola: FCStone(FCSX Quote) is our favorite sleeper stock. This commodity adviser/broker trades at its cash value of $90 million. Yet, it currently earns about $15 million yearly pretax in its core advisory segment even though it earns at present virtually no interest on its customers' deposits. It earned $48 million in interest income in fiscal 2008.

It is a way to play an uptick in commodity prices as FCStone would benefit from increased customers' transactions. FCStone is being penalized for the major mistake it made in losing over $80 million from an energy account. I believe it was a one-time event in extraordinary illiquid market conditions and that FCStone has substantially lowered its risks. Tangible book exceeds $5 a share.

theStreet.com link


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