J.P. Morgan analyst Kenneth Worthington resumed coverage of Virtu Financial Inc. at "underweight," saying "extremely low" market volatility is putting "significant" pressure on revenue and profitability.
However, Worthington said the acquisition of KCG Holdings Inc. offers cost and revenue synergies. In the near term, he said, Virtu Financial will have plenty of opportunities to cut costs at KCG, which had been posting losses. However, cost-cutting may "dampen" KCG's earnings recovery in the longer term when market conditions improve, he said. He also said the acquisition may weigh on Virtu Financial's valuation due to lack of transparency and KCG's earnings volatility.
The analyst said "intense" competition or increased costs of doing business were probably weighing on the profitability of Virtu Financial and KCG. Also, Virtu Financial's trading revenue and earnings have been declining in the low-volatility environment with the company's commodities, foreign exchange and Europe, Middle East and Africa equities business seeing deteriorating profits, Worthington said.
He gave a $13 price target for Virtu Financial. He revised his EPS estimates to 55 cents from $1.07 for 2017 and to $1.05 from $1.13 for 2018. He set his 2019 EPS estimate at $1.16.