MarketAxess Holdings Inc. ( MKTX Quick Quote MKTX - Free Report) stock came under pressure following the company’s weak trading volumes for the second quarter. The stock lost 4.6% in a single trading session. Estimates Turn Bearish
Analysts have downgraded 2021 and 2022 earnings estimates for the company. Over the past 60 days, the same has been revised 2.32% and 2% downward, respectively.
Q2 Results to Lack Luster
MarketAxess’ total trading volume for the second quarter declined 8.3% year over year and 17% sequentially. This was due to lower bond trading. There was a decline in overall credit market activity from the last year due to economic disturbance caused by the pandemic.
The company’s bond trading business thrives when credit spread volatility increases. Last year, credit spread volatility was greater than this year and credit spreads in high-grade were also wider. Credit spread widening means more riskiness in the market, which is when bond looks more attractive. Last year it also witnessed huge debt issuance by corporates. These factors resulted in an increase in bond trading, which in turn aided volume, revenues and earnings growth of the company.
The company earns commission and fees revenues on the trades executed on its platforms. Thus, a decline in trading volumes will weigh on commission and fees revenues, which constitute 90% of the company’s revenues.
Long-Term Growth Story Still Intact
MarketAxess is credited for revolutionizing the way bond trading was carried on traditionally by bringing in automated trades. The bond trading market lagged other fellow equity currency and other trading markets in adopting electronic trades. Even now, most of the trading for bonds is done and settled on phone calls.
The company’s founder Richard McVey spotted an opportunity early on to make bond markets efficient by automating the bond trading system. Via its automated trading platform, it allows bonds to be traded electronically. The company is the leading electronic trading network for the institutional market of U.S. credit products. It is also rapidly expanding outside the United States and now has businesses in Europe, U.K. as well as Singapore. It is also investing in Asia-Pacific.
This global expansion provides the company with ample room to grow in the $100-trillion global fixed income market, which is still awaiting electronic transformation.
MarketAxess’ various acquisitions have complemented organic growth. The buyout of Liquidity Edge provided MarketAxess with an attractive entry point to the U.S. bond Treasury market. The MuniBrokers acquisition expanded MarketAxess’ existing municipal bond trading solution for global institutional investor and dealer clients. The acquisition of the Regulatory Reporting Hub expanded MarketAxess’ post-trade reporting, and pre-and post-trade data service services across a broader European client base, particularly in Germany, France as well as the Nordics.
The company’s solid growth in core products, superior financial model, large and increasing addressable market, significant operating leverage along with an expanded suite of electronic trading protocols poise it for long-term growth.
Near-Term Weakness and High Valuation
The company’s long-term growth prospective looks good, with right products in place to provide much needed solutions to credit markets. However, decline in trading volumes might put earnings under pressure, which in turn might drag the stock. The company has been incurring high expenses, which increased 18.1% for the first quarter. It expects total expenses for 2021 in the range of $370-$386, which has been revised upward from the previous range of $362-$382 million. This indicates a rise of 20% year over year.
So far this year, the stock has lost 19.8% against the
industry’s growth of 16.9%. Other stocks in the same space such as Tradeweb Markets Inc. ( TW Quick Quote TW - Free Report) , CME Group Inc. ( CME Quick Quote CME - Free Report) and Cboe Global Markets, Inc. ( CBOE Quick Quote CBOE - Free Report) have gained 39.4%, 14.6% and 26.9%, respectively, over the same time period. Image Source: Zacks Investment Research
From a valuation perspective, the stock looks overvalued. Its forward 12-month price-to-earnings ratio of 52.18 is way higher than 22.04 for the S&P 500. It is also higher than the five-year median of 45.73.
Thus, until the company’s business volumes gain strength, we should keep away from the stock.
It currently carries a Zacks Rank #4 (Sell).
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