Company Overview

Interactive Brokers Group Inc. (NASDAQ: IBKR) is a global electronic broker that is fully automated. Hedge and mutual funds, exchange-traded funds (ETFs), registered investment advisers, proprietary trading groups, introducing brokers, and individual investors can all use the company's custody and service accounts. As an electronic broker, the Company executes, clears, and settles transactions for both institutional and individual customers across the world. The company specializes in executing orders and processing trades in stocks, options, futures, currency, bonds, mutual funds, ETFs, metals, and cryptocurrencies in around 150 electronic exchanges and market centers across the world.

IBKR Details

Key Takeaways from Q1FY22 financial results

• Commission revenue decreased 15% to USD 349 million on customer stock volume that dropped from an unusually active trading period last year but was aided by higher customer options and futures trading volumes.
• Due to a drop-in securities lending activity, net interest income fell 8% to USD 282 million, largely offset by gains on margin lending and segregated cash holdings. Other income dropped by USD 159 million, resulting in a USD 39 million loss. The non-recurrence of a USD 99 million gain related to the strategic investment in Up Fintech Holding Limited ("Tiger Brokers"), USD 29 million related to the company's U.S. government securities portfolio, and USD 16 million related to the company's currency diversification strategy accounted for most of the decrease.
• When compared to the year-ago quarter, when the reported pre-tax profit margin was 72 percent and 68 percent as adjusted, the current quarter's reported pre-tax profit margin was 61 percent and 64 percent as adjusted.

Recent Developments

• On May 2, 2022, Interactive Brokers Group, Inc. released its April 2022 Electronic Brokerage monthly performance data.

Key highlights include:

• 204 million Daily Average Revenue Trades (DARTs), up 1% from the previous year and down 10% from the previous month.
• Ending client equity was USD 324.5 billion, down 6% from the previous year and 9% from the previous month.
• Client margin loan balances ended the month at USD 46.8 billion, up 4% year over year but down 3% month over month.
• Including exchange, clearing, and regulatory expenses, the average commission per cleared Commissionable Order is USD 2.57.
• Interactive Brokers Group, Inc. on 20th April 2022, announced results for the quarter ended March 31, 2022.
• The company announced on 21^st April 2022, the appointment of Jill Bright as an independent director of the firm effective immediately. Ms. Bright has over 30 years of experience, having worked with Sotheby's as Executive Vice President of Human Resources and Administration, LionTree LLC and Condé Nast as Chief Administrative Officer, and American Express for over five years in Human Resources in high leadership positions. Ms. Bright also serves on the boards of two private firms, NYC-based Simulmedia and Grand Rapids-based Service Express. She is now a Board Director and Chair of the Compensation Committee for WOW Internet & Cable.
• The Board of Directors of Interactive Brokers Group, Inc. announced a quarterly cash dividend of USD 0.10 per share. This cash dividend generates a dividend yield of 0.71% as per the price on the declaration date. This dividend will be paid on June 14, 2022, to owners who have held their shares from June 1, 2022.

Other key highlights from Q1 FY22 Financial results

• In the first quarter of 2022, customer accounts expanded by 36% to 1.81 million, while customer equity increased by 8% to USD 355.9 billion, compared to the same period the previous year.
• When compared to the same quarter a year earlier, customer credits climbed by 9% to USD 92.5 billion, while customer margin loans increased by 14% to USD 48.2 billion.
• The company's currency diversification strategy reduced comprehensive earnings by USD 59 million in this quarter, as the GLOBAL's U.S. dollar value fell by about 0.56 percent. The implications of the currency diversification strategy are indicated as a loss of USD 18 million in Other Income and a loss of USD 41 million in Other Comprehensive Income.

Balance Sheet & Liquidity Position

• Increased cash balance: The company at the end of the Q1 FY22 had total cash and cash equivalents of USD 2.67 billion, relatively higher than USD 2.395 billion as of 31 December 2021.
• Improved debt balance: Total debt for the company at the end of Q1 FY22 was USD 11.69 billion reduced from USD 11.796 billion for the quarter ended 31^st December 2021.

Top 10 shareholders

The top 10 shareholders together form around 49.79% of the total shareholding, while the top 4 constitute the maximum holding. Kayne Anderson Rudnick Investment Management, LLC and The Vanguard Group, Inc hold the maximum stake in the company at 8.64% and 8.45%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Exchange Rate Fluctuation Risk: Company in its last quarter reported a loss of USD 59 million because of foreign exchange rate fluctuations, making Exchange rate fluctuation risk one of the primary risk factors for Interactive Brokers Group Inc.
• Regulatory and legal risk: Securities and derivatives are severely regulated industries. Financial services firms have been subjected to a more regulated environment in recent years, and regulatory bodies' penalties and fines have escalated in response. All parts of the Company's broker-dealer subsidiaries are subject to regulations in the United States and internationally. Noncompliance with applicable rules or regulations may have a negative impact on the company's reputation, prospects, sales, and profits. Changes in present laws or regulations, as well as governmental policies, might have a negative impact on the company's business, financial situation, and operating results.
• Competition risk: Financial institutions, mutual fund sponsors, and other organizations compete with IBKR, with many of them offering online, direct market access, or other investment options. The market for electronic and interactive bidding, offering, and trading services in connection with stocks, options, and futures is fast-growing and fiercely competitive, and this trend is projected to continue.

Outlook

With a 50-basis point rate rise, the corporation is predicted to generate an additional USD 175 million per year, and with the Fed likely to raise rates eight times, each subsequent 25 basis point will yield an additional USD 25 million. For the coming year, the accounts growth rate is predicted to be over 30% and the business wants to reach 10 million deals every day. With the company's continued development in client services and expansion of operational locations, fixed expenditures are likely to rise by roughly 15%. Finally, the company's operating margins are predicted to stay in the mid-60s in 2022.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, IBKR's share price has corrected by 26.90%. The stock is currently leaning towards the lower end of its 52-week range of USD 52.18 to USD 82.83. We have valued the stock using the Price/Earnings multiple-based relative valuation method and arrived at a target price of USD 68.14. We believe that the company is trading at a discount from its peer's average, considering its fall in revenue and profitability for the Q1 FY22, but strong fundamentals, competitive advantages in profitability margins, and a good cash position give bullish estimates for the upcoming near future. We have taken peers like Goldman Sachs Group Inc, Morgan Stanley, and Charles Schwab Corp for the evaluation of the intrinsic value.

Considering the strong fundamentals, robust margins, dividend yield, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 54.04 as of 18^th May 2022.

IBKR Technical Chart, Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Note 3: The report publishing date is as per the Pacific Time Zone.