One of Wall Street's biggest winners of the day is Tradeweb Markets, a capital markets company whose shares have climbed 6.1% to a price of $146.76 -- near its average analyst target price of $151.53.
The average analyst rating for the stock is buy. TW outperformed the S&P 500 index by 6.0% during today's afternoon session, and by 8.5% over the last year with a return of 23.8%.
Tradeweb Markets Inc., together with its subsidiaries, builds and operates electronic marketplaces worldwide. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Tradeweb Markets's trailing 12 month P/E ratio is 60.4, based on its trailing EPS of $2.43. The company has a forward P/E ratio of 38.2 according to its forward EPS of $3.32 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 15.92, and the average for the S&P 500 is 29.3.
Tradeweb Markets's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2024 | 897,741 | 40,960 | 856,781 | 17.76 |
| 2023 | 746,089 | 18,529 | 727,560 | 19.35 |
| 2022 | 632,822 | 23,214 | 609,608 | 8.64 |
| 2021 | 578,021 | 16,878 | 561,143 | 29.97 |
| 2020 | 443,234 | 11,490 | 431,744 | 46.24 |
| 2019 | 311,003 | 15,781 | 295,222 |
- Average free cash flow: $580.34 Million
- Average free cash flown growth rate: 18.7 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TW have received an annualized dividend yield of 0.3% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Tradeweb Markets's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 5, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.78 as of the third quarter of 2024.
With a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, we can conclude that Tradeweb Markets is probably overvalued at current prices. The stock presents strong growth indicators because of its strong operating margins with a positive growth rate, and an inflated PEG ratio.
