By
Alex Dumortier, CFA
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June 20, 2008
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Ouch! On Tuesday, derivatives broker MF Global (NYSE: MF ) gave the market two scoops of bad news. (1) It is seeking $300 million in additional financing that will be dilutive to common shareholders, and (2) it lowered revenue and profit guidance for the current fiscal first quarter. The market hit back on Wednesday -- mercilessly -- lopping off more than 40% of the company's value. In a post-Bear Stearns world (now part of JPMorgan Chase (NYSE: JPM ) ), investors are prone to shooting first and asking questions later.
MF Global was spun out of U.K. hedge fund manager MAN Group last July. Since then, it has rattled the market once with a $142 million dollar loss courtesy of a rogue trader. That episode and the current profit warning illustrate the risks to a small financial firm that is focused on a narrow set of activities. Lehman Brothers (NYSE: LEH ) is another example. Despite efforts to diversify its revenue, a heavy reliance on fixed income means it is now struggling to remain independent.
By contrast, Goldman Sachs' (NYSE: GS ) earnings release this week showed its investment banking and prime brokerage units compensated for weakness in debt markets. (Being in multiple business lines sure is helpful in a credit crisis.) Even Citigroup (NYSE: C ) , which has had a rough time of it recently, has substantial nonmarket businesses that generate large and steady profits. At this stage, the evidence simply doesn't support the idea that MF Global's spinoff has created shareholder value: Shares closed at $25.62 on their first day of trading; they finished yesterday at $7.83 -- a near-70% loss!
Still, yesterday's selling looks overdone at first glance. MF Global's revised range for net revenue in the fiscal first quarter is $360 million to $390 million. The midpoint of that range would simply imply no growth over the year-ago quarter, which is hardly a disaster (although it falls far short of the 15%-20% net revenue growth the company set itself for fiscal 2009). With shares at this level, they may attract bargain-hunters. For my part, I think there are enough other opportunities now in simpler businesses that I'll take a pass on MF.
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