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Analyst Blog

Interactive Brokers Group, Inc.’s (IBKR - Analyst Report) technological expertise positions it among the lowest-cost providers of broker-dealer services, thereby giving it a competitive edge. The stock closed at $24.22 on Nov 22, reflecting a strong year-to-date return of 77.7%.

Going forward, with consistent improvement in the bottom line, there remain chances of price appreciation. Therefore, continuing to hold it in your portfolio is not a bad option.

However, given the inconsistent performance of Interactive Brokers’ Market Making segment, a stringent regulatory environment and risks associated with its international exposure, we discourage further addition of its shares to your portfolio.

Justifying the Stance

Interactive Brokers’ third-quarter 2013 earnings per share of 32 cents were in line with the Zacks Consensus Estimate. Moreover, this compared favorably with 26 cents earned in the year-ago quarter.

Interactive Brokers’ Electronic Brokerage segment continues to witness improvement. The company enjoys competitive advantage with respect to its trading system containing unique architectural aspects and massive trading volumes throughout the world market. Additionally, the company continues to explore opportunities in the fast growing markets of Taiwan, Mexico and India.

Further, Interactive Brokers’ robust capital base and liquid balance sheet remain strengths. As of Sep 30, 2013, the company had $2.91 billion of excess regulatory capital.

On the flip side, Interactive Brokers’ Market Making Segment tends to be pressurized as the company continues to disburse regular payouts from the mentioned segment. Though the Market Making segment’s performance improved this quarter, we are concerned about its consistency in generating sufficient returns to fund dividend payment.

Moreover, globally the company faces uncertainty related to political, economic and financial instability, sudden changes in regulatory requirements, trade barriers, exchange-rate fluctuations and applicable currency controls.

In line with our analysis, the Zacks Consensus Estimate reflects a mixed scenario. While the Zacks Consensus Estimate for 2013 advanced 9.5% to 81 cents, for 2014 it declined 1.7% to $1.13 over the last 60 days. However, the company carries a Zacks Rank #2 (Buy), indicating short-term upside potential.

Other Stocks to Consider

Other investment brokers worth considering include Ladenburg Thalmann Financial Services Inc. (LTS - Snapshot Report), Evercore Partners Inc. (EVR - Snapshot Report) and Investment Technology Group Inc. (ITG - Snapshot Report). While Ladenburg Thalmann Financial Services carries a Zacks Rank #1 (Strong Buy), Evercore Partners and Investment Technology Group hold the same Zacks Rank as Interactive Brokers.

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