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Bear of the Day: Interactive Brokers Group (IBKR)

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Even big investors make mistakes, but those mistakes are usually brushed aside if the company’s overall performance is above par.  Yet, when earnings, and net revenues decline as well, the mistakes are scrutinized.  This is the case with the Zacks Bear of the Day, Interactive Brokers Group (IBKR - Free Report) . 

One segment that significantly underperformed is the Market Making segment, which is currently under formal review by the CEO.  Specifically, the CEO has given the segment 12months to reverse their current course or risk being liquidated, sold, or some other alternative solution.

This Zacks Rank #5 (Strong Sell) company is an automated global electronic market maker and broker specializing in routing orders and executing and processing trades in securities, futures and foreign exchange instruments on more than 70 electronic exchanges and trading venues around the world. As a market maker, they provide liquidity at these marketplaces and, as a broker, they provide professional traders and investors with direct access to stocks, options, futures, forex and bonds from a single IB Universal AccountSM.

Recent Earnings Report

Management announced Q2 16 results on July 19 where they beat the Zacks Consensus Earnings results, but came very short of the Zacks Consensus Revenue estimate.  The company saw on a year over year basis declines in Diluted earnings per share -8.1%, Net revenues -4.7%, Commission and execution fees -3%, Customer option contracts -8%, Stock shares volume -40%, Pretax profit margins down -3%.  Further, the company experienced a $2 million loss in their currency diversification strategy, compared to a profit of $53 million in 2015.  Most importantly, in the Market Making segment, income before taxes fell by -83% to $5 million.  Also, in the Market Making segment, pretax profit margins decreased to 12%, down from 42% in Q2 15. 

Price and Consensus

As you can see from the graph below, IBKR had been outperforming expectations for the past two years, but their most recent earnings report caused both the stock price to decline and future estimates to be lowered.

Estimate Downgrades

There is unanimous analyst agreement of negative EPS estimates for Q3 16, Q4 16, FY 16 and FY 17; Q3 16 dropped from $0.38 to $0.34, Q4 16 fell from $0.39 to $0.35, FY 16 slipped down from $1.69 to $1.64, and FY 17 declined from $1.72 to $1.64.

Bottom Line

The Market Making segment’s performance is what analysts are really worried about as the CEO has put the segment under formal review.  While the other segments do suggest potential growth, the company has seen commission grown lagging.  Further, the low level of interest rates is another headwind facing the company. 

If you are inclined to invest in the Financial/Investment Bankers segment, you would be best served to look into Goldman Sachs (GS - Free Report) , and or Morgan Stanley (MS - Free Report) , both currently carry a Zacks Rank #3 (Hold).  The majority of the segment is currently ranked #4 or #5, Sell, and Strong Sell.

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