December has turned out the be one of the worst months on record for the UK’s leading spread betting and CFD providers CMC Markets (LSE: CMCX) and IG Group (LSE: IGG). The business practices of these two groups have come under attack from not one, but two, regulators that have decided it’s time to clamp down on the sale of contract for difference, or CFD, products to retail investors.
Both the UK’s Financial Conduct Authority and Germany’s BaFin have issued new regulatory guidance on how CFD providers can market the products to new investors with the goal of protecting inexperienced retail investors from losing more than they can afford with these highly leveraged products.
CMC and IG immediately responded to the proposed regulatory changes stating that while the crackdown comes as a surprise, it won’t have a material impact on their businesses. Specifically, CMC has issued a press release stating: “CMC has consistently focused on higher-value experienced premium clients who understand the markets and products they are trading…CMC’s business model and ongoing strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships.”
Meanwhile, IG has claimed that the FCA’s proposals could actually benefit its clients: “The company has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes.”
Trading down
Despite statements from both CMC and IG that the regulatory clampdown won’t have a severe impact on their businesses, shares in these two brokers are still trading more than 40% below where they were before the FCA announcement.
It looks as if there’s an opportunity here for patient long-term investors. City analysts have now had time to digest the FCA’s proposals and it appears the new rules won’t be the end of CMC and IG after all.
Analysts are predicting a 17% decline in earnings per share for CMC for the year ending 31 March 2017 and a 5% decline in EPS for the year ending 31 March 2018. They’re expecting IG’s earnings to grow by 4% for the year ending 31 May 2017 and slide 6% for the year after. Not great, but not disastrous either.
Based on these forecasts, shares in IG and CMC are trading at forward P/Es of 10.5 and 7.2 respectively. Also, shares in CMC support a yield of 7.2% and IG yields 6.4%. Both payouts are covered 1.5 times by earnings per share.
Conclusion
So overall, shares in IG and CMC look cheap after recent declines. If the companies do manage to navigate the new FCA and BaFin CFD rules as managements are predicting, now might be an excellent time to snap up the shares at a bargain price with a highly attractive dividend yield on offer. But be careful before diving in. As these companies profit from market volatility, there’s no certainty that the current City forecasts will come to fruition unless market conditions are perfect for the next two years.
