Penson Worldwide – Exceptional Value for Patient Investors

Penson Worldwide – Exceptional Value for Patient Investors

Penson offers a broad range of securities, futures and derivatives processing infrastructure products and services, either unbundled or as a suite of end-to-end, fully integrated solutions. 

These include clearing, execution, custody, margin lending, facilities management, technology, and other related products and services that allow us to process a high volume of transactions while maintaining a stable, reliable support environment. 

Additionally, they support trading in multiple investment products, in multiple currencies, in multiple markets and in multi-lingual applications.

Equities, Options & Futures                                   Clearing, Settlement and Custody

Intelligent Execution Solutions

Prime Brokerage

Active/Retail Trader Platforms

Access to Global Markets

Portfolio Margining

Market Data Services

Investment Advisor Services

Mutual Funds

Fixed Income

Suite of Algorithms

Access to Dark Pools

Foreign Exchange (FX)

Trade Aggregation Capabilities

Penson Worldwide [NDQ:PNSN - $7.85] is not well known by the public but is a solid niche player with a market cap of about $200 MM and average daily trading volume of around 145M shares. 

Penson came public in the hot market of 2006 and saw its shares climb from $15 to over $34 by early 2007. EPS peaked with the market at $1.26 that year before dropping to a low of $0.42 in the dismal environment of 2008. Operations have remained profitable throughout the tough times and current Zacks estimates for 2010 – 2011 now run $0.42 and $0.91 while others see $0.49 and $0.83 respectively.

Penson has signed an agreement to purchase the securities processing division of Broadridge Financial Solutions. This should close in the fourth quarter of 2010 making PNSN the second largest in the field and giving it economies of scale that should serve to increase profitability.

The single biggest hurdle towards higher profitability has been the near-zero, short-term interest rate environment. PNSN typically makes a large portion of its profits through net interest revenue from both customer balances and from conduit stock lending to other broker dealers. Once interest rates start moving higher this source of earnings should ramp up very quickly and significantly.

At the present price of $7.85 /share this increased earnings power does not seem to be reflected in Penson’s quote. Here are the historical per share numbers from the time of Penson’s IPO in 2006.

The takeaways from the chart are that while earnings have been volatile, revenues have been much steadier and book value has continued to build even through the tough times.

 When times were good PNSN shares changed hands at more than three times book value. Today they are offered at about 67% of book.

On average PNSN has ranged from 14x – 19x earnings. If you look out to next year’s expectations for $0.83 – $0.91 the shares are now at just 8.6x – 9.5x those very achievable numbers. Even fourteen times the lower estimate for 2011 would bring PNSN back to $11.62 or 48% above yesterday’s close.

Is that a rational target price? Why not? Just a glance at the chart shows these shares have touched $12.23 – $34.91 during each of the previous four years and they’ve been as high as $10.54 already since the start of 2010.

Penson would appear to have little downside from today’s $7.85 quote and substantial upside as a play on better markets and higher future interest rates.

Dr. Paul Price

www.BeatingBuffett.com

Disclosure: Author is long PNSN shares and short PNSN puts.