On Tuesday, MF Global (MF) released their first quarterly earnings report after listing on the NYSE in July. Recall Zachstocks covered the stock on October 1 as the stock approached the original IPO price. The report came after the stock made a new high Monday closing at $31.53. By the time trading concluded Tuesday afternoon, the stock had given back over 8% and closed back below the IPO price of $30. Analysts seemed relatively happy with the results but were somewhat surprised by the level of adjustments necessary to come up with a clean earnings figure for the quarter.

After adjusting for litigation, IPO expenses and various other items, it appears the company earned a normalized $0.42 up 68% from the same period last year. Revenue was up sharply on stronger trading during the tumultuous market conditions experienced this summer. The execution only portion of trading volume had a higher percentage gain than the cleared portion. Cleared trades have a higher margin because MF is paid for the additional function of assessing counter-party risk and holding sufficient funds to back that risk. The company also had healthy numbers in its principal transaction business where the brokerage takes the opposite side of clients trades to facilitate liquidity.

One negative item that may have effected the stock price was the lower rate per contract. Wachovia noted that in periods of higher volatility and higher transaction rates, many clients likely reached a point where their volume of trades touched off discounts due to contract stipulations. This is actually a good problem to have as it means clients are pushing more orders through and generating more revenue per account. The phenomenon will likely reverse back to normal levels if we see a bit less volatility in the fourth quarter.

Management continues to focus on expanding globally and has its eye on its Asia Pacific presence. This will likely mean continued acquisitions similar to its recent acquisition of BrokerOne – the largest futures broker in Australia. The importance of expansion into growing geographies is underlined by the fact that US and Western Europe markets are becoming increasingly mature and competitive. The company was able to see the spread on NII (Net Interest Income) widen largely as a function of more international client balances. Continued growth in the number of retail clients and the number of international clients will likely continue to widen (benefit) the NII spread.

While the stock gave back a good amount of gains on the news, I do not view Tuesday’s action as a “deal killer” for the stock. If the price is able to stabilize here above the 50 day and analysts are able to get more information when the company files its 10Q November 14th, we will likely see a rebound and another move higher. The market hates uncertainty and the fuzzy earnings report likely caused a bit of concern, but the numbers continue to point to strong growth, healthy diversification, and costs under control.

MF Notes

FD: Author has a long position in MF