StoneX Group Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

StoneX Group Inc. is a financial services provider, specializing in global market access, risk management, and trading solutions for institutions, commercial businesses, and individual investors, operating in a complex and highly regulated environment.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

StoneX Group Inc. operates as a global financial services network, connecting its clients to various financial markets. Its operations span across multiple segments and geographic locations. To evaluate its long-term sustainability and value, a deep dive into its revenue streams, competitive landscape, and financial robustness is required.

  • Revenue Distribution:
    • Commercial: This segment provides brokerage, risk management, and trading solutions to commercial businesses, especially those in the agricultural and energy sectors. These revenues are susceptible to commodity prices and market volatility.
    • Institutional: This segment includes brokerage services, clearing, risk management, and electronic trading services to financial institutions such as hedge funds, asset managers, and banks. The volume and activity of this segment are dependent on financial market activity.
    • Retail: This part deals with forex, bullion, and other products for retail investors. It depends largely on consumer confidence in financial markets and trading instruments.
    • Global Payments: This segment involves providing payment solutions to companies, financial institutions and government organizations. These revenues are determined by transaction volumes and foreign exchange rates.

Industry Trends and Competitive Landscape: The financial services industry is always in motion, and faces continuous disruption through technology and evolving regulations. StoneX has to contend with:

  • Increased competition from both traditional and fintech companies offering similar services and products. There are many new competitors focused on specific areas of the market that are providing the same products or services with less costs.
  • Regulation is a constant concern, due to the complexity and rapidly changing legal and regulatory framework of the financial industry.
  • Digitalization is changing how the financial services are delivered and the user experience, requiring companies to invest on technology and improve their systems continually.

The company’s competitive landscape includes larger, well-established financial services firms and numerous nimble start-ups. StoneX’s differentiation lies in its diversified product portfolio, global reach, and its expertise across a variety of niche markets. However, it doesn’t have any moat because competitors can easily replicate its offering if they have enough capital and resources.

  • Financials Analysis:

    • Revenue Growth: Revenue has grown over the years but has also shown extreme volatility. The volatility in the revenue is directly tied to global markets and price fluctuations. The revenues from some segments are often linked to the price of commodities, which have volatile price swings. However, in 2022 and 2023 they were able to increase revenues across almost all segments.
    • Profit Margins:
      • Operating margins vary significantly between the different parts of the business (commercial, institutional, retail, and global payments). The most recent results have seen an expansion in operating margin in all segments and they seem to be improving, although the operating margins overall are still pretty low (single digit percentages) which suggests high competition.
      • The profit margins are affected by trade volumes, market volatility, interest rate fluctuations, and the cost of borrowing.
      • For fiscal year 2022, net income was $415 million, compared to $380 million the previous year. The increase is partly because of higher client trading volumes and higher interest income.
      • During 2023, they saw reduced operating income with higher compensation expenses due to increases in employee compensation, and increases in professional and consulting fees, along with IT related costs. That did affect ROE, ROIC and share values, even though revenues were up. That is due to a mix of higher revenues but also higher costs, which is something you would expect in a highly competitive environment.
    • Capital Structure:
      • The company has a mix of short-term debt, and long-term debt. The company’s debt-to-equity ratios are reasonable and the cash flow is stable enough to manage these liabilities and its short-term obligations. However, it also includes variable rates and long term debt, so changes in the macroeconomic environment can be a real threat to the stability of the company.
      • The net debt was just above 2.8 billion, which is more than the 2.5 billion in the previous year. This is due to increases in balances payable to brokers/dealers and an increase in securities financing and a decrease in cash balance.
    • Return on Invested Capital (ROIC): ROIC has been varying but trending upwards. That is driven in part because the company has been able to grow revenues in all segments and has been able to lower expenses in some segments. The management has focused on higher-return operations and that is also helping the overall return metrics. It is currently above 10 percent, which would mean good returns are being generated.
      • Net operating income plus net operating taxes was $380 million which was much higher than the $270 million in the prior year.
    • Cash Flow: The cash flow has been improving in the last year because of higher trading volumes. Free cash flow was negative in 2021 and 2022, but they had higher cashflows in 2023.

Risks to the Moat: * Competition: The biggest risk to the company is increasing competition from both traditional and online trading platforms. This competition makes it harder for them to control price and margins. * Regulation: As a financial service provider, new regulations, sanctions or unexpected laws can be a major threat. Especially because the financial markets are very heavily regulated and they need to comply to different regulations in all regions they are active. * Technology: Disruptive technology and changes in the financial infrastructure can have a significant effect on their business. They are also facing disruption from new technologies such as crypto currencies and blockchain. * Interest Rates: Their profitability is influenced heavily by interest rates. Higher interest rate costs can eat into their margins and also influence trade volumes, affecting revenues in all segments. As interest rates change, so can trade volumes and the overall market sentiment. * Market Volatility: High volatility in financial markets causes uncertainty in the company’s revenue and profit margins and the value of their assets.

**Business Resilience**
*  While exposed to volatility, the business has a diverse base of revenues from different segments and regions, so they are not entirely reliant on a specific trend or sector for their overall revenue and earnings. This somewhat provides resilience.
* The company is making continuous investments in their infrastructure and technology, so they are well placed to benefit from the increasing digitalization.
* The senior management of the company is committed to continuous growth and to keeping investors happy. They've bought back shares and have also provided dividend, which shows a good commitment towards shareholders.

Moat Rating: 2/5

While StoneX has a reasonably well-established business with a diversified revenue stream, its moat isn’t very well-defined. The concept of moats suggests that some businesses have underlying characteristics that make them less likely to lose ground to competitors. These characteristics can be the brand, regulatory licenses, cost advantages or other characteristics that competitors can’t just replicate easily. Although StoneX has grown its business and has acquired a lot of companies, it does not have anything unique that can prevent competitors from replicating their business model. Most of their offerings can be easily replicated by other companies provided that they have the resources and capital needed to start a similar business. Their moat relies more on scale rather than structural features. So a small but solid moat, which could become wider as the company expands its reach. This moat can easily be breached and eroded and it doesn’t present a very sustainable competitive advantage.

Understandability: 3/5

StoneX’s business model can be moderately complicated for outsiders because it operates in multiple segments and multiple regions and it serves all kinds of different clients with varied and differentiated needs. Analyzing the company and its financials requires a deep understanding of financial statements, and of the economic and business context in which they operate. It is hard to make estimates about the company’s earnings. However, it is not one of the most complex companies out there.

Balance Sheet Health: 4/5

StoneX has a reasonably healthy balance sheet. The level of debt is manageable compared to the total assets of the business, but the high leverage that the business has would mean that it is more sensitive to interest rate fluctuations. The company has a long history of successful operations and an established position in the financial industry. Their diversified revenue sources provide some stability. In the most recent earnings, the company showed increases in all important performance metrics, but also a big increase in employee related expenses. So the operating margins improved slightly, the business remains a resilient one.

This report includes data and commentary based on the given materials up until the cut off point. Any information released after the cut-off time is not included in the report.