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MarketAxess (MKTX) Gains on Top-Line Growth, High Costs Hurt

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MarketAxess Holdings Inc.’s (MKTX - Free Report) revenues have been consistently growing since 2005 (except 2008 when revenues declined just 0.6%). Revenues have witnessed a CAGR of 13% from 2012-2017. This top-line growth was primarily driven by persistent increase in commission (which forms the lion’s share of total revenues) received on trading volumes. The same was up 11.4% in the first quarter of 2018. The company has been successful in increasing its trading volumes by way of inorganic and organic strategies.

Its efforts of pursuing international opportunities, a compelling economic market model and a diversified product suite of the coveted U.S. high-grade floating rate and other credit bonds to broaden the scope of volumes growth for MarketAxess, going forward, will further drive commission revenues. The company is also witnessing an uptick in post-trade and services revenues mainly due to MiFID II implementation fees.

MarketAxess supplements its organic growth by entering into strategic alliances, or by acquiring businesses or technologies, which enable it to enter new markets, provide new products or services. Some of the notable deals to this end included the acquisition of Xtrakter Limited which provided the company with an expanded set of technology solutions; a strategic alliance with BlackRock, Inc. which improved the range of trading connections available to global credit market participants; agreement with S&P Dow Jones Indices to jointly develop indices that will track the most liquid segments of the U.S. corporate bond market. The company’s inorganic growth which has also aided top-line growth remains impressive.

The company has been able to fund its acquisition backed by its strong liquidity position. Notably, it has been generating free cash flow from past several years. Strong liquidity not only mitigates balance-sheet risks, but also paves the way for an accelerated capital deployment in employees, trading platform, new products, geographic expansion and infrastructure.

The company remains focused on enhancing shareholders’ value through share buy and dividend hikes. Earlier this year, the company raised dividend by 27%, marking eight consecutive years of dividend hike.

While MarketAxess’ growth strategy has led to noticeable increase in the top and bottom line, escalating costs remain a significant headwind. Total expenses increased at 13% on average from 2013-2017, thereby weighing on the company’s margins. In the first quarter of 2018, the same was up 14% year over year. 

We expect the company’s expenses to rise over the coming quarters given its ongoing investments in several areas including trading platform, new protocols and infrastructure as well as headcount additions. Notably, for 2018, the company anticipates total expenses in the range of $220-$232 million. The midpoint of this range reflects about 15% year-over-year increase in expenses.

Year to date, the stock has gained 1.2%, compared with the industry’s growth of 6.9%. Though this performance pales in comparison with the growth of 18.9%, 13.3%, 5.8% for Nasdaq, Inc. (NDAQ - Free Report) , CME Group Inc. (CME - Free Report) and Intercontinental Exchange Inc. (ICE - Free Report) , respectively, the company’s strong fundamentals should lift the stock in the coming quarters.

MarketAxess carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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