We have downgraded our long-term recommendation on
Interactive Brokers Group Inc.
) to Neutral from Outperform based on colossally increasing
expenses. Despite the decent performance by the company in the
fourth quarter, we remain apprehensive about the steady generation
of adequate returns by its Market Making segment to subsidize
However, Interactive's healthy liquidity position, sturdy
capital base and technological excellence continue to be the
positive contributors. In addition, robust performances by its
Electronic Brokerage and Market Making segments, along with high
barriers to entry further reinforce its position.
Interactive's fourth-quarter 2011 earnings outpaced the Zacks
Consensus Estimate substantially. Results were facilitated by
higher revenue and net income attributable to non-controlling
interests. However, these were partially mitigated by elevated
interest and non-interest expenses.
A solid capital base as well as a highly liquid balance sheet
with low leverage, grants Interactive a better-than-peer
positioning. The company was able to actively manage its excess
liquidity and uphold hefty borrowing facilities through the
securities lending markets and banks. Additionally, the company
maintains over $2 billion of excess regulatory capital in its
broker-dealer companies worldwide.
Also, Interactive has become the largest electronic broker with
regards to daily average revenue trades (DARTs). Lower commissions
and financing rates as well as superior trading tools offered by
the company helped in attaining this noteworthy feat. In 2011,
cleared DARTs increased 19% to 409,000 compared with 2010.
Interactive has positioned itself at the crossroads of
globalization, adoption of technology, spreading of equity culture
and optimization of resource allocation on global electronic
networks by processing trades in stocks, futures, options and forex
on more than 90 exchanges across 27 countries and in 17 currencies.
Moreover, adoption of technology has led to higher profit margins.
Also, owing to the company's technological excellence, its
compensation expense is minimal relative to the net revenues,
unlike many of its peers.
On the other hand, Interactive's dependence on IBG LLC remains
an area of concern. The primary asset of the company is its 11.5%
equity interest in IBG LLC. In addition, its controlling interest
and related rights as the lone managing member of IBG LLC makes it
dependent on revenue generation.
The company incurs taxes on its proportionate share of the net
taxable income of IBG LLC as well as expenses on its self
operations. Inability of IBG LLC in providing ample funds to
Interactive for tax payment or any other purpose will affect the
company's financial condition adversely.
As per the recent dividend strategy of Interactive, the regular
quarterly dividend will be paid from its Market Making segment. Due
to this, the segment's capital base could get eroded over a period
of time and in case of the segment's failure to produce adequate
return to pay dividend, the company will be forced to deploy its
capital through dividend, which will reduce its financial
Currently, Interactive retains a Zacks #3 Rank, which translates
into a short-term Hold rating. However, one of its peers,
Knight Capital Group Inc.
) retains a Zacks #4 Rank (short-term Sell rating).
INTERACTIVE BRK (
): Free Stock Analysis Report
KNIGHT CAP GP (
): Free Stock Analysis Report
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