CMC Markets (LSE: CMCX) was one of the big movers on the UK stock market on 25 August, after releasing a profit warning.
It wasn’t a good move, mind. Early trading saw the share price fall 20%, though it’s clawed back a bit of that as I write.
CMC shares have plunged more than 50% in the past 12 months, and the five-year chart shows a striking boom and bust. So what’s happened, and are the shares a buy now?
The past five years
CMC provides investment trading services. That includes shares, forex, spread bets, contracts for difference (CFD), with most revenue coming from the CFD business.
There’s global spread too, with operations in the UK, Europe, and around the world.
It looks like the business has been doing well enough, but profits have been a bit uneven. Profit before tax recently peaked in 2021, at £224m. Earlier that year, the share price reached over 550p, but it’s down to 106p as I write.
In 2022, that profit figure dropped by more than half, to £91.5m. And it fell further for the year to March 2023, to just £52.2m.
Profit warning
What about this latest profit warning?
The company now tells us that “subdued market conditions have continued through August with trading and investing net revenues trending 20% lower year on year.“
CMC now expects net operating income to come in between £250m and £280m.
That’s not too far below 2023, when the firm posted net operating income of £288.4m. But the correlation with profits is less clear.
Income actually rose that year by 2%, but we saw profit before tax slump by 43%.
Forecasts
Prior to this update, forecasts saw profit picking up a bit for the 2023-24 year, then growing strongly in the next two years.
It might take some time for analysts to adjust their takes now. But CMC markets shares looked like good value to me.
We had a forward price-to-earnings (P/E) ratio of only bit over eight, dropping to 4.5 by 2025-26. And the predicted 6% dividend yield would climb to 10% by the same year.
I can’t think of another small-cap UK stock with that kind of outlook. At least, not one that offers such potentially lucrative trading services.
Bet, or buy the firm?
To me, spread bets and CFDs are nothing more than gambling. But the UK’s gaming and betting firms have a habit of raking in the cash.
So, I wouldn’t put a penny into what I see as high-risk trading. But I’d be quite happy to buy shares in the companies operating it, and take some of the gamblers’ cash.
I fear this latest profit warning might spell trouble for another couple of years. And I’ve no way to tell where the bottom lies and how low it might be.
But right now, CMC looks to me like it might be a buy for the next stock market bull run. It’s on my list for a closer look.
