One of Wall Street's biggest winners of the day is Futu, a capital markets company whose shares have climbed 5.0% to a price of $92.58 -- near its average analyst target price of $94.81.
The average analyst rating for the stock is buy. FUTU outperformed the S&P 500 index by 5.0% during today's afternoon session, and by 20.8% over the last year with a return of 60.2%.
Futu Holdings Limited provides digitalized securities brokerage and wealth management product distribution service in Hong Kong and internationally. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
Futu's trailing 12 month P/E ratio is 23.9, based on its trailing EPS of $3.88. The company has a forward P/E ratio of 17.4 according to its forward EPS of $5.31 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 20.04, and the average for the S&P 500 is 29.3.
FUTU’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Futu, we obtain a PEG ratio of 71.65, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Futu's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,281,340 | 443,573 | 50 | 13.64 |
| 2022 | 975,969 | 390,820 | 44 | -2.22 |
| 2021 | 912,267 | 349,562 | 45 | 2.27 |
| 2020 | 427,015 | 147,936 | 44 | 158.82 |
| 2019 | 136,282 | 75,988 | 17 |
- Average operating margins: 40.0 %
- Average operating margins growth rate: 13.2 %
- Coefficient of variability (lower numbers indicate less volatility): 193.54 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Futu's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -811,352 | 9,956 | -821,308 | -289.32 |
| 2022 | 445,417 | 11,603 | 433,814 | -43.05 |
| 2021 | 770,803 | 9,033 | 761,770 | -71.06 |
| 2020 | 2,638,392 | 5,759 | 2,632,633 | 1007.82 |
| 2019 | 252,834 | 15,193 | 237,641 |
- Average free cash flow: $648.91 Million
- Average free cash flown growth rate: -28.1 %
- Coefficient of variability (the lower the better): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for FUTU, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Futu's P/B ratio of 0.47 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Finance sector was 1.86 as of the third quarter of 2024.
Futu is by most measures overvalued because it has an average P/E ratio, an exceptionally low P/B ratio., and positive cash flows with a downwards trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and strong operating margins with a positive growth rate. We hope you enjoyed this overview of FUTU's fundamentals.
