This Monday brought positive trading updates from two prominent London-listed market-making mid caps: CMC Markets PLC (LSE:CMCX) and Plus500 Ltd (LSE:PLUS).
Relative newcomer Plus500 soared ahead of market forecasts, posting US$725 million in revenues and US$340 million in underlying earnings (£570.5 million/£267.5 million), outstripping forecasts by 12% and 13% respectively.
CMC, meanwhile, upped its full-year net operating income guidance from £250-£280 million to £290-£310 million in a bullish trading update.
This may have taken some analysts by surprise when considering that market volatility, or lack thereof, was working against both market makers in 2023.
Analysts at Jefferies noted that the Volatility Index (VIX), which measures the stock market's expectation of volatility based on S&P 500 index options, averaged 13 in 2023 compared to a long-term average of 20.
This can materially impact market makers like CMC and Plus500, as high volatility often leads to higher trading volumes, translating into a higher revenue take.
Yet both platforms have brushed this aside to deliver strong financial performances.
Jefferies commended the “strength and quality of Plus500’s client base” as a key driver of growth.
“The group continues to invest in the business, including in the quality of customers, brand and geographic footprint,” analysts said. “This will sustain growth longer term yet, despite this investment, the group continues to generate high levels of cash which, in turn, drives high levels of shareholder returns.”
Those shareholder returns were attractive in 2023, with Plus500 returning US$350 million via dividends and buybacks.
CMC also benefitted from a desirable client mix, according to Shore Capital Markets analysts, who praised the improvised contributions from business-to-business and institutional clients within the group’s trading division.
Taking off from different starting positions
The new year may have started with a bang for both Plus500 and CMC, but their starting positions were not exactly parallel.
It’s not quite an apples-for-apples comparison – CMC is a more sophisticated platform than Plus500, particularly when it comes to tradeable assets on offer – but both are subject to the same cyclicality and macro headwinds.
CMC’s positive trading update follows a series of earnings downgrades from analysts on the back of disappointing revenue performance and costs.
This is reflected in the shares, with CMC down more than 40% year on year, while Plus500 remains in the green by a few percentage points.
But even with this heavy discount, the City seems lukewarm on CMC stock… For now anyway.
“The most recent downgrade we put through was largely driven by the trading division where volumes were subdued and the cost of hedging institutional flow was greater than expected,” wrote ShoreCap in a research note.
Adding: “Today’s positive trading update reflects how sharply the fortunes of this side of the business can turn. If the improvement in revenue contribution from B2B in the trading business can sustain, justifying the significant investment the company has made here, we could take a more constructive view on CMC shares.”
In lieu of a “more constructive view”, ShoreCap’s prevailing CMC share price target remains at 70p, a 50% discount on today’s market value (though this follows a 22% intraday rally).
Jefferies is also bearish with a 75p CMC price target, though the bank wasn’t as forthcoming with its justifications.
Meanwhile, Jefferies analysts predict a 39% upside on Plus500 stock, while Liberum and ShoreCap also have 'buy' recommendations on the shares.
The key takeaway appears to be: Approach CMC with caution, until a clearer view of the company’s fortunes emerges.