Thursday, January 27, 2011

TMX Group 2

This is a stock (TSX-X) that I follow but do not own. It is classified as a financial stock and I already have too much in the financial area with my bank and insurance holdings. This stock was created when the Toronto Stock Exchange went public in 2002. What I want to look at today is what my spreadsheet says about the current price and what the Analysts say about this stock.

However, first I want to see what the Insider Trading report says. The thing that stands out is that, except for the directors, insiders have more stock options than shares. This is not what I like to see, but it is very common. There has been a small bit of insider selling over the past year, but it is insignificant. There has been no insider buying.

There are two indications of confidence of the insiders in this company. The first thing is that the stock options that have recently been issued have been kept. The other thing is that the dividends were increased in 2010. The increase was for just over 5%. This is lower than the 5 year average of 11%. However, this is the first increase in 3 years.

When I look at the Price/Earnings Ratios, I find that they are high. The 5 year median low P/E Ratio is 18 and the 5 year median high P/E Ratio is 25. The current P/E Ratio of 12.5 is therefore low on a relative basis. Sites that use the last 12 months earnings in their P/E Ratio calculations get a much higher P/E ratio of 23. They give a forward P/E Ratios closer to mine at 12.3.

I get a current Graham Price of $27.75. The stock price of $38.35 is 38% higher than the Graham Price. The low stock price is, on average, 126% above the Graham Price. This is because there was a huge difference between the stock price and the Graham Price between 2004 and 2007. As I have said before, the stock price of TMX fell in 2008 and has not yet recovered.

When I look at the Price/Book Value Ratio, I get a 10 year average of 10.09. This is a very high ratio. The current one at 3.29 is only 30% of the 10 year average. This shows that the stock price is relatively cheap. However, a P/B Ratio of 3.29 is not a low one.

The last thing to look at is the Dividend Yield. The current yield of 4.2% is good and it is higher than the 5 year average of 3.9%. The other thing to note is that the average 5 year payout ratio based on earnings is 73% and the average 5 year payout ratio based on cash flow is 49%. It is expected at the current dividend rate that the payout ratio based on earnings will be 53% and the payout ratio based on cash flow will be 48%. It is hard to say if there is much room for increased dividends in 2011.

When I look at analysts’ recommendations, I get the full range. There are Strong Buy, Buy, Hold, Underperform and Sell recommendations for this stock. The consensus recommendation would be a Hold. (See my site for information on analyst ratings.)

Some analysts are worried that competition could limit TMX’s growth in the future. The best anyone says is that the stock is fairly valued. Some mention the fact that it has good free cash flow and future dividends and dividend increases will not be a problem for this stock. TMX also stands to make money every time one of the Unit Trust companies converts to a corporation. They get a fee for each change. There should be lots of this in 2011.

TMX Group operates Canada's two national stock exchanges, Toronto Stock Exchange serving the senior equity market and TSX Venture Exchange serving the public venture equity market, Natural Gas Exchange (NGX), a leading North American exchange for the trading and clearing of natural gas and electricity contracts and Shorcan Brokers Limited, the country's first fixed income interdealer broker. TMX Group also owns The Equicom Group Inc., a leading provider of investor relations and related corporate communication services in Canada. TMX Group has its headquarters in Toronto and maintains offices in Montreal, Calgary and Vancouver. Its web site is here TMX. See my spreadsheet at x.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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