I have digged a bit deeper in BGC, but their equity-based compensation still puzzles me. It seems to be very dilutive - in Q1 they actually confirmed that stock comps create ~5-6% dilution. In the latest Q3 call they mentioned that they expect shares outstanding to be flat over 2024, even though they've spent $150 mln for share repurchases and $70 mln for redemption and repurchase of equity awards only in the first 6 months of 2024.
So, if we include buybacks which are made just to compensate for dilution, then their profts/FCFs are almost zero. Basically, in line with their reported GAAP profits.
You're correct — equity compensation is always a challenge for me (and others) to get past. When you look at BGC on a GAAP basis, it’s not very profitable, but on an adjusted basis, it appears cheap and profitable. Part of my thesis is that as the business transitions from the legacy voice/hybrid model to a fully electronic model, fewer brokers will be needed, which should result in reduced equity compensation. Consequently, GAAP Net Income and Adjusted Income should converge over time — not necessarily 1:1, but closer than they are today. I evaluate the stock on a GAAP basis and see them leveraging their fixed OPEX cost base (around $600 million currently). Whether they generate $2 billion or $3 billion in revenue, the back-office costs remain relatively stable, which is where the operating leverage becomes evident. For FY25, I project GAAP EPS to grow 70% year-over-year, while Adjusted EPS is only expected to grow 16% (convergence).
Hi Dominick, thank you for a write-up.
I have digged a bit deeper in BGC, but their equity-based compensation still puzzles me. It seems to be very dilutive - in Q1 they actually confirmed that stock comps create ~5-6% dilution. In the latest Q3 call they mentioned that they expect shares outstanding to be flat over 2024, even though they've spent $150 mln for share repurchases and $70 mln for redemption and repurchase of equity awards only in the first 6 months of 2024.
So, if we include buybacks which are made just to compensate for dilution, then their profts/FCFs are almost zero. Basically, in line with their reported GAAP profits.
What is your opinion about it?
You're correct — equity compensation is always a challenge for me (and others) to get past. When you look at BGC on a GAAP basis, it’s not very profitable, but on an adjusted basis, it appears cheap and profitable. Part of my thesis is that as the business transitions from the legacy voice/hybrid model to a fully electronic model, fewer brokers will be needed, which should result in reduced equity compensation. Consequently, GAAP Net Income and Adjusted Income should converge over time — not necessarily 1:1, but closer than they are today. I evaluate the stock on a GAAP basis and see them leveraging their fixed OPEX cost base (around $600 million currently). Whether they generate $2 billion or $3 billion in revenue, the back-office costs remain relatively stable, which is where the operating leverage becomes evident. For FY25, I project GAAP EPS to grow 70% year-over-year, while Adjusted EPS is only expected to grow 16% (convergence).