For the first time in three years, Instinet Group (Nasdaq: INGP) recorded a profitable year. The electronic broker-dealer has strung together four straight quarters of making money, and, though the stock has essentially remained flat for the year, it has picked up over the past few months as rumors swirled over a possible merger with competitor Archipelago Holdings (AMEX: AX).
Instinet is a global securities broker that grants some 1,500 institutional customers the ability to trade securities over 40 global markets -- in London, Paris, Frankfurt, Sydney, Tokyo, and locations in other countries, as well as on the Nasdaq and the New York Stock Exchange in the U.S. In the fourth quarter, Instinet's average daily share volume in U.S. equities increased 8% to 3.98 billion shares.
Even so, the company's revenues declined 5% to $290 million. That still beat analyst estimates and was a 7% increase sequentially, resulting in earnings of $18.7 million. A nice rebound from the $38 million loss it recorded last year.
Instinet is majority-owned by Reuters (Nasdaq: RTRSY), a financial data provider with a 63% stake in the company. The brokerage has downplayed the need to actually shop the asset, but Archipelago has emerged as the front-runner in the merger rumors, ahead of Knight Trading Group (Nasdaq: NITE) and the stock exchanges themselves. Archipelago recently took over the regional Pacific Stock Exchange, a relic of a bygone era and a sector ripe for consolidation. Possible asking prices have ranged as high as $3 billion.
The brokerage has two business lines: the institutional Instinet branch that allows clients to execute their securities orders with other institutional customers, and the INET electronic marketplace that offers a large liquid assemblage of Nasdaq-listed stocks. It's this latter unit that has caused the brightest twinkle in Archipelago's eye. It posted revenue increases of 16% in the quarter, to $121 million, as U.S. equities maintained their frothy advance.
Back in August, Instinet's stock had reached a 52-week low of just above $4 a share, 45% off its high of $7.48 reach in April. It has clawed its way back to more than $6 a share, based mainly on the takeover rumors. But with more than $956 million in net cash on the balance sheet, nearly half the stock's current price is represented by cash. It also sports an enterprise value-to-free cash flow ratio of less than 10.
It should prove an attractive acquisition for someone, and with a new profitability streak, it might attain more of a premium.
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Fool contributor Rich Duprey would never consider streaking for fear of horrifying onlookers. He does not own any of the stocks mentioned in this article.
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