We reiterate our long term 'Neutral' recommendation on
Interactive Brokers Group Inc.
), to reflect strong capital base and a liquid balance sheet. The
company's better-than-peer positioning and technological excellence
make us optimistic. Despite these positives, we remain concerned
about the Market Making segment's ability to consistently generate
sufficient returns to fund dividend payment.
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. Further, the company has a very low level of compensation
expense relative to the net revenues, mainly due to its
Additionally, Interactive continues to explore opportunities in the
faster growing markets. Thus, at present, more than 50% of the new
customers are from outside the U.S, resulting in a larger
diversification of revenues. With the Central Clearing Houses as
its counterparties, sole trading with exchange-listed instruments
and continuous monitoring of customer positions, the company has
been able to restrict its credit risk to a great extent.
Moreover, Interactive's robust capital base and 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. Also, from April 2011, the company
started declaring quarterly dividend of 10 cents per share and
since then has maintained the same level.
On the flip side, Interactive is exposed to certain risks related
to its international operations. Globally, the company faces
uncertainty related to political, economic and financial
instability; sudden changes in regulatory requirements; some trade
barriers; exchange rate fluctuations; and applicable currency
controls. Volatility of the U.S. dollar against other currencies
could be a near-term resistance to earnings improvement.
Further, Interactive's dependence on IBG LLC remains a cause of
concern. The company's primary asset is its 11.9% equity interest
in IBG LLC. Also, its controlling interest and related rights as
the only managing member of IBG LLC make it dependent on revenue
generation. If IBG LLC is unable to provide sufficient funds to
Interactive Brokers to pay taxes or for any other purpose, the
latter's financial condition may suffer significantly.
According to Interactive's 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. The segment's failure to generate sufficient return to pay
dividend will force the company to deploy its capital through
dividend, thereby lowering its financial flexibility.
However, Interactive currently retains a Zacks #4 Rank, which
translates into a short-term Sell rating. One of its peers,
Knight Capital Group, Inc.
) retains a Zacks #3 Rank (short-term Hold rating).
INTERACTIVE BRK (IBKR): Free Stock Analysis
KNIGHT CAP GP (KCG): Free Stock Analysis Report
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