On Mar 14, 2013, we downgraded
Interactive Brokers Group, Inc.
) to Underperform based on the company's lower-than-expected
fourth quarter 2012 results and disappointing performance of the
Market Making segment. Moreover, the company has delivered an
average negative surprise of 20.4% over the past 4 quarters.
Why the Downgrade?
On Jan 15, Interactive Brokers announced its fourth quarter 2012
earnings of 19 cents per share, which lagged the Zacks Consensus
Estimate of 21 cents. Further, Net revenues of $247.1 million
were 9.5% lower than the Zacks Consensus Estimate of $273.0
According to Interactive Brokers' latest dividend strategy, the
regular quarterly dividend will be paid from its Market Making
segment. As a result, the segment's capital base could decline
over a period of time. This segment's failure to generate
sufficient return for paying dividend will force the company to
deploy its capital for the same. Consequently, the company will
lose its financial flexibility.
Causes for Concern
Interactive Brokers' 11.9% equity interest in IBG LLC is also an
area of concern. Also, its controlling interest and related
rights as the only 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 and incurs expenses related to its own
operations. If IBG LLC fails to provide sufficient funds to
Interactive Brokers to pay taxes or for any other purpose, the
latter's financial condition may suffer significantly.
EVERCORE PARTNR (EVR): Free Stock Analysis
INTERACTIVE BRK (IBKR): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
PIPER JAFFRAY (PJC): Free Stock Analysis
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Increasing number of high frequency trading firms (HFTs) are
resulting in additional competition for the Market Making segment
of the company. Unregistered HFTs are not exposed to all the
regulatory restrictions which are applicable to the registered
market makers. This leads to faster and cheaper trades on some
exchanges by these HFTs, which could take a toll on Interactive
Brokers' business in the future.
Stocks That Warrant a Look
While we prefer to avoid Interactive Brokers shares until we see
signs of improvement in the company's performance, other
financial institutions that are worth considering include
Evercore Partners Inc.
Piper Jaffray Companies
) . Evercore and Piper Jaffray carry a Zacks Rank #1 (Strong
Buy), whereas Morgan Stanley holds Zacks Rank #2 (Buy).