We have downgraded our long-term recommendation on Interactive Brokers Group Inc. (IBKR) to Underperform from Neutral based on the company’s mediocre fourth quarter 2010 results.
Interactive Brokers’ fourth quarter operating earnings of 15 cents per share lagged the Zacks Consensus Estimate of 17 cents. However, the results surpassed the prior-year quarter earnings of 7 cents. Though Interactive Brokers’ results benefited from lower non-interest expenses it was more than offset by decline in net revenue.
Interactive Brokers’ profitability largely depends on trading volume on the bourses. A low volume of trade in securities and derivatives due to a weakness in equity markets can hurt the company’s business. During 2010, total trading volume declined 3% year over year.
About 19% of Interactive Brokers’ net revenue was generated from outside the United States during 2010. Also, its operations are geographically diversified.
Hence, the company is exposed to certain risks such as uncertainty related to political, economic and financial instability, unexpected changes in regulatory requirements, some trade barriers, exchange rate fluctuations, and applicable currency controls that related to its international operations.
Further, Interactive Brokers’ dependence on IBG LLC is a cause of concern. The company has 10.8% equity interest in IBG LLC, which is its primary asset. The company’s controlling interest and related rights as the only managing member of IBG makes Interactive Brokers dependent on revenue generation. IBG’s inability to provide sufficient funds to pay taxes or for any other purpose would significantly affect Interactive Brokers’ financial condition.
However, Interactive Brokers’ strong capital base and highly liquid balance sheet with a low leverage set it apart from its competitors. The company was able to actively manage its excess liquidity and maintain significant borrowing facilities through the securities lending markets and banks. The company also maintains excess regulatory capital in its broker-dealer companies worldwide.
Moreover, as a part of its growth strategy, Interactive Brokers processes transaction in stocks, futures, options and forex on more than 90 exchanges across 19 countries and in 15 different currencies. The company also continues to explore new high growth markets in emerging economies such as India, Mexico and Taiwan. This has resulted in more than 50% of the new clients coming from outside the U.S., leading to a greater diversification of revenue.
Currently, Interactive Brokers’ shares retain a Zacks #5 Rank. This translates into a short-term Strong Sell rating and indicates significant downward pressure on the shares over the near term. However, Interactive Brokers’ close competitor Piper Jaffray Companies (PJC) has a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
INTERACTIVE BRK (IBKR): Free Stock Analysis Report
PIPER JAFFRAY (PJC): Free Stock Analysis Report
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