Welcome to Episode 121 of Special Situation Investing.
This week’s write-up took me outside of the typical companies we analyze, and while I haven’t committed to buying the stock myself, I did learn a lot in the process and hope that you find some of what I discovered fascinating as well. As you will see, analyzing this company forces you to formulate an opinion on broad macro economic topics like Central Bank Digital Currencies (CBDCs) and the future of cash transactions, and while we’re nowhere close to being experts in those areas, some of the thought experiments involved in the process were both fascinating and insightful and will no doubt prove useful down the road. As Warren Buffett frequently reminds us “knowledge in investing is cumulative” and what we learn today will often benefit us in the future even if we don’t act on it right away.
With that obligatory introduction out of the way, let’s get into our discussion of Currency Exchange International (CXI on the TSX or CURN on US OTC markets).
Currency Exchange International
Currency Exchange International is a founder-led fintech company led by CEO Randolph W. Pinna. Mr. Pinna is a graduate of the University of Central Florida where he earned a bachelor’s degree in finance with a focus on international business. Prior to his tenure as CEO of CIX, he was the Chief Executive Officer of the Bank of Ireland Group’s North American Foreign Exchange Business where he was responsible for asset management, lending, currency exchange and accounting. Mr. Penna holds just over 21% of CIX shares outstanding giving him “skin-in-the-game” and an incentive to make shareholder-friendly decisions.
Before jumping into an analysis of the company, it’s worth noting that CXI stock under performed the S&P 500 from 2013 through today. Typically our write-ups include a gut-wrenching chart demonstrating what you could have earned on your invested dollars if only you’d known with perfect clarity where to put your money ten years ago, but in this case, avoiding CXI saved you from a 7.2% CAGR versus 13.5% for the index or put differently a nearly 50% under performance over the last decade.
In fact, CXI stock traded at nearly the same price from 2014 through 2019 as it does today. On the surface, it appears the business, like the stock, hasn’t changed much over the last ten years but contrary to what you might think, the business itself is growing steadily year after year even while the stock trades sideways. This is made evident through even the most cursory comparison of the company’s stock performance against their earnings and revenue growth over the same time period. Putting the COVID-induced earnings downturn of 2020/21 aside, you see a steady up and to the right pattern in earnings as compared to the sideways pattern of the company’s stock performance over the same time period.
Company History
CXI began its corporate journey in October of 2007 with a single retail store in Tampa Bay Florida. The company was a small scale retail currency exchange operator in the US domestic market that competed alongside other larger currency exchange businesses. By 2009, CXI had expanded to 8 retail stores and launched CXIFX, the company’s web-based foreign currency exchange software, that sought to grow the retail business and eventually expand into wholesale currency exchange operations.
By 2012, CXI had established service relationships with financial institutions that allowed for the expansion of its wholesale operations and expanded its regional footprint from its original Miami Florida vault to include regional vaults in New York, California, and Toronto, Canada. In March of 2012, CXI completed its IPO on the Toronto Stock Exchange trading under the ticker symbol CXI and later listed under the symbol CURN on US OTC markets.
Between 2013 and 2015, CXI was servicing over 10,000 transacting locations and was a provider for national financial institutions in both the US and Canada. During the same time period, CXI entered into wholesale banknote operations in both the US and Canada allowing them to move from currency exchange to wholesale distribution of US and Canadian bank notes internationally.
It’s worth noting that the business described so far is what could have been purchased in 2014-2015 for nearly the same price as it trades for today. Keep that in mind as we review the businesses evolution from 2015 through today and consider how much more value an investor today gets for the same share price.
In 2016, the Minister of Finance of Canada approved CXI’s banking application and Currency Exchange International of Canada Corp was renamed the Exchange Bank of Canada. By 2017, the Exchange Bank of Canada was accepted for SWIFT membership thus expanding its global payment capabilities. In 2018, CXI launched Online FX, a website allowing consumers to reserve foreign currency online and pick it up at their local branch. This business was further expanded in 2020 from a reservation system to one that provided overnight home delivery of currency to costumers in 24 US states.
In 2020, CXI’s primary competitor, Travelex, exited the US currency exchange market leaving no US domestic competition for CXI. CXI since expanded its US domestic exchange operations to include airport currency exchange operations run by agent operator partners who use the CXI brand but do not charge the parent company for payroll and leasing.
Expanding the interoperability of CXI’s proprietary software with outside financial institutions has been a focus of the company for some time. The driving idea behind the program was for banks and credit unions to easily be able to adopt CXI’s software systems without having to change their own platforms so adoption would be as seamless as possible. The company took a significant step in this direction in 2021 and has seen their share of institutional adoption grow commensurately since that time. Here is a description of the process from the CXI 2021 annual report:
Core to CXI expanding its foreign exchange services to financial institution clients is integrating the company’s proprietary web-based FX software CXIFX with established client endpoints. In 2021, CXI announced its participation in Jack Henry Banking®’s Vendor Integration Program, enabling CXIFX to integrate with their SilverLake, CIF 20/20, and Core Director platforms. This follows CXIFX’s 2019 integration with Fiserv’s WireXchange. The integration with Jack Henry Banking increases the addressable bank and credit union market for CXI. Developing integrations into core platforms improves client processes and makes transitioning to CXI, their one provider for multiple foreign exchange services, an easier process.
2021 saw additional changes to CXI’s business model as it was approved to participate in the Federal Reserve Foreign Bank International Cash Service (FBICS) program. According to frbservices.org:
The FBICS program is designed to permit certain foreign banks that do not have a presence in the United States to open limited-purpose master accounts on the books of the Federal Reserve Bank of New York (“FRBNY”), and to use those accounts to access Federal Reserve Bank currency services in connection with their international banknote operations. In order to participate, foreign bank applicants must meet the FBICS program eligibility criteria, and must engage in wholesaling USD banknotes in a manner that meaningfully contributes to the global distribution of USD banknotes. Entities approved for participation in the FBICS program will receive access to the FRBNY’s international USD currency services, including the ability to place orders for USD banknotes from the FRBNY on a same-day basis, to have USD currency orders fulfilled solely with new USD banknotes (as opposed to previously circulated banknotes), and to receive expedited processing of large-denomination USD banknotes deposited with the FRBNY.
CXI described their FBICS approval as follows in their 2021 annual report:
In August 2021, EBC announced it was approved to participate in the Federal Reserve’s Foreign Bank International Cash Services (FBICS) program. Through FBICS, EBC receives access to the Federal Reserve’s International Cash Services program. By becoming an approved participant of the FBICS program, EBC is well positioned to serve international based clients who have few avenues to source bulk and mint US dollar shipments, a definitive, unique advantage for clients and prospects. With a high barrier for entry, the competition in the global wholesale banknotes sector has been limited for many years. EBC has already onboarded new global financial institutions through a rigorous risk-based approach, thereby allowing for significant new revenues with a low-risk profile.
The best quote I came across during my research of CXI’s participation in the FBIC program was from an August 2023 VIC write-up by Avalon216 who wrote “if you want to succeed in an industry having the Fed as your partner is a good place to start, and we think that investors underappreciate how strong CXI’s relationship with the Fed has become.”
Again, while CXI stock traded sideways for the better part of a decade we see that the business itself has steadily grown year after year. Starting out as a small retail currency exchange with a single location in 2007, it has grown to include a monopoly on US domestic retail currency exchange, global wholesale currency exchange operations, a direct relationship with the US Fed and a Canadian banking license with an ever-expanding payments and banking software integration business. The payments business alone generated more income for CXI in 2023 ($14 million) than the combined gross income of the entire company in 2012 ($12 million) and this from a subset of the business that didn’t even exist within CXI only a decade ago.
Why the disconnect between the business and the stock?
Now, if CXI the business is doing so well and growing while the stock lags behind, then investors must ask the obvious question, why doesn’t the stock price reflect that growth? The precise answer to that question can’t be known for sure but a few widely held misperceptions do seem to be effecting the stocks performance.
The generally held misperceptions can be summed up as follows: cash is in secular decline and its eventual replacement by a CBDC is all but assured. These commonly held perspectives are likely giving investors pause before they commit their capital to a currency exchange and payments company. But before accepting what Howard Marks describes as “first level thinking” perhaps we should spend some time analyzing those commonly held beliefs to see if they’re in fact accurate.
The first commonly held belief is that cash use is in secular decline. This belief stems from accurate information on consumer spending patterns reflecting the gradual decline in cash payments compared to electronic payments over time. But just because we see a steady decline in a variable like cash payments doesn’t mean that the variable will continue to decline all the way to zero. Specific factors like the rise in online shopping or the proliferation of electronic payment options have obviously effected consumer spending patterns and payment methods but in situations where cash is the only means of payment or the most practical means to accomplish an end cash will continue to be used and its utility might never go to zero.
According to the Federal Reserve frbresources.org website both “cash on person” and overall cash holdings have increased since 2020 despite the common belief that cash is going away. Regarding cash-on-person holdings the Fed had the following to say:
Average on-person holdings remain elevated compared to pre-pandemic. Compared to 2019, people were still holding onto more cash in 2022. On average, each consumer held approximately $73 in cash and used this cash for purchases (Figure 12). This increase in holdings was observed across all age groups, although the extent of the increase varied. The age group with the greatest increase in both the amount and proportion of cash holdings was 18-to-24-year-olds. Despite the increase in cash holdings, those aged 18-to-24 reduced their cash use by 20 percentage points, bringing them closer in line with adults aged 25 to 54. Whether these increased cash holdings by 18-to-24-year-olds will result in greater cash use in the future remains uncertain.
The chart below, sourced from the same Fed article, indicates total cash holdings have also increased dramatically since 2020. In 2019, the average person held $241 of cash in reserve but by 2022 that number had shot up to $419. Not surprisingly total cash in circulation also increased from somewhere in the neighborhood of $1.8 trillion in 2019 to nearly $2.2 trillion by 2022 representing at least a 20% increase in cash in circulation. This brings up the often overlooked point that as the total money supply inflates so too will the supply of physical currency in circulation along with cash holdings by individuals and families.
The above points address the near-term concern that cash will be completely displaced by the rise in electronic payments but leaves open the question of whether or not central bank digital currencies themselves will kill paper currency once and for all. I’m no expert on the subject but some preliminary research on the topic challenged many of the commonly espoused beliefs related to CBDCs and the death of cash transactions to include my own.
This is an aside but it’s fascinating to hear the same people argue opposite sides of the CBDC, bitcoin, and cash discussion based on which thing they’re discussing at the time. Some say bitcoin isn’t a viable currency because it’s not tangible. If the power went out, they argue, you couldn’t spend your money and the economy would grind to a halt. Many of those same people would also claim that world governments will soon institute CBDCs and ban physical currency. This leaves you wondering if the power could just as easily go out and bring a CBDC economy to a halt as it could a bitcoin economy. Perhaps the true misconception is that CBDCs, crypto currencies, gold and physical currencies are mutually exclusive and that the world must have a single form of money that eventually eliminates all others. This is sort of a “one ring to rule them all” view of economics.
It’s hard to imagine a better window through which you can view a possible CBDC future than the Peoples Republic Of China. China is one of the world’s most centrally controlled nations and has already pushed hard for electronic payments and digital currency but has that eliminated cash or cash payments? The answer is no, not only has it not eliminated cash but according to chinadaily.com China’s paper currency in circulation in 2022 totaled over nine trillion Yuan or about 1.4 trillion USD. Not only is there a significant amount of paper currency in circulation in China but the Peoples Bank of China, the country’s central bank, fined 32 entities, to include several public service entities, for refusing to accept cash in just the fourth quarter of 2022. Fines ranged from 1,000 - 100,000 Yuan and illustrate the point that paper currency is far from dead even in nation states where the means and the will to eliminate it already exist.
The US dollars reserve currency status might make the elimination of paper dollars even more of a challenge for the US than that faced by other nations who do not have reserve currency status. It’s one thing to expect middle class Americans to eliminate cash transactions from their financial lives but another thing entirely to expect the rest of the world to operate on a digital dollar without a paper currency. Such a transition would require all foreign nations that interact with the dollar to be fully compatible with and interoperable with the digital dollar CBDC system.
I know for a fact that the US military frequently uses cash to settle transactions during foreign operations particularly in the early stages when quick access to supplies and infrastructure are required. It’s difficult to imagine the military being unable to acquire fuel and access because the counterparty they’re working with doesn’t have an account with the Federal Reserve or doesn’t want to accept CBDC as payment. This is only one example where physical currency is required to run the dollar system but I’m sure that experts in other areas can come up with equally compelling scenarios that support the continued use of paper currency, especially in a system that is as globally integrated as the US dollar.
This brings us to our final point on the topic which is that a CBDC or digital dollar might require third party settlement rails that aren’t required with decentralized technologies like bitcoin. Bitcoin is decentralized and transparent and therefore requires no third party payment platforms or authenticators. CBDCs, however, will be centralized and to some degree not transparent meaning that payment systems like swift and ACH will likely be required to make the system function. If, therefore, the supply of fiat currency in circulation continues to rise over time and if CBDC’s require third party platforms like Swift to function, then companies like CXI are uniquely positioned to earn ever greater fees from the services they provide even if the dollar fully converted to a CBDC.
In the lead up to posting this write up my co-host and I discussed how the impact of technological change is often the opposite of what you’d expect. In 1995, I remember thinking that total mail volume would decline going forward because most of what was in the mail could now be sent as email. In those days, people still wrote letters and it seemed logical that the letters would turn into emails and that only packages would need to be sent physically. I haven’t looked closely at the data but I suspect that I was wrong and that total mail volume is significantly higher today than it was in 1995 even when you account for the increase in population because people order so much more directly to their homes instead of buying it at the store.
I don’t remember anyone in the 90s ordering soap, a climbing rope, new running shoes, decorations for your kids 7th birthday and who knows what else online and yet I’ve ordered all of those things and more in just the last few months directly to my home without going to the store. The point is that the obvious effect isn’t always what you get. You create email and physical mail volume goes up. You create anti-lock break technology and vehicle collisions increase as people accommodate and over rely on the technology. Perhaps by creating CBDCs and a hundred different digital payment apps both cash transaction volumes and third-party processing fees go up rather than down? Of course we can’t know what will happen next but if the outcome isn’t what we expected it wouldn’t be the first that humanity was surprised.
This write up is going long and we haven’t even touched on the purely accounting merits of CXI. Low debt, high margins, growing revenue etc. are all things that should be studied carefully before any investment is made but I will have to trust that if the wave-top introduction we covered so far has captured your interest then you will study the other merits of CXI on your own.
What can be said from this brief introduction, however, is that CXI is an owner-operator company with over a decade long track record of intelligent and largely unlevered growth. Furthermore, with almost no change in the stock price between 2014 and today, an investor today gets a company with a Canadian banking license, a payments business, a banking and FX trading software integration suite, a monopoly on US domestic retail currency exchange and a direct relationship with the US Federal Reserve for its wholesale banknotes operation. Because none of this was in place at CXI a decade ago and because, for now, you can purchase the company for essentially the same price as you could have then we believe it’s worth investor’s time to read up on Currency Exchange International.
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Currency Exchange International (CXI)