The CMC Markets (LSE: CMCX) share price is out of the box this morning on the release of the firm’s full-year results. As I write, the stock is up around 2% building on gains over the past couple of days leading up to today’s news release. I reckon the growing online and mobile trading service provider is an attractive potential investment in the financial sector and a decent alternative to buying shares in one of the big London-listed banks such as Barclays (LSE: BARC).
One of the things I like about CMC Markets is its high return on capital, which is running close to 29%. Today’s figures are good with net operating income 16% higher than last year and earnings per share up 26%. I take the directors’ decision to hold the full-year dividend at last year’s level as a sign of caution in the outlook, which is unsurprising given recent upheavals in the sector.
A changing regulatory landscape
The regulators have been bearing down on firms dealing with trading products. Changes to retail Contracts For Difference (CFD) start on 1 August and a ban on binary products in Europe takes effect on 2 July. Binaries generated the company £4.5m of revenue in UK and Europe during the trading year to in March, which is around 2.4% of the total. However, the firm’s clients meeting the criteria to be classified as ‘professional’ can opt out of the new rules for trading and, so far, around 40% of the company’s revenue comes from such professional traders who are not bound by the incoming regulations.
Chief executive Peter Cruddas said in the report that clarity about the regulatory changes in Europe allows the firm to work with its “balanced portfolio” of retail, professional and institutional clients. He is “confident that our technology and service-led strategy will continue to deliver profitable growth.” In the meantime, the new trading year has started with a financial performance “broadly in line” with the prior year equivalent period.
Ongoing progress
Looking forward, the firm is rolling out a new mobile platform, opening an office in Shanghai, China, working on growing its institutional business, and making “significant progress” regarding its white label stockbroking partnership with ANZ Bank in Australia. There’s a lot going on and I reckon the firm is poised to do well for investors from where we are now.
I’d rather take my chances with CMC Markets than with Barclays, even though the banking goliath sports an attractive-looking valuation, at least on the surface. Today’s share price around 201p puts the forward P/E rating for 2019 at around 8.8 and the forward dividend yield is just over 4%. Many will be attracted to the bank for its dividend, but I’m staying on the sidelines because I don’t trust the cyclicality in the general banking sector.
Any future downturn in the economy is likely to send the earnings, the dividend and the stock plummeting and such capital losses from the share price could wipe out years’ worth of dividend income. Meanwhile, the share price has travelled broadly sideways for years and I reckon the market will keep pushing down the bank’s valuation, even as profits grow, in anticipation of the next cyclical down-leg. That’s why I’d shun Barclays and snap up CMC Markets instead.
