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Does MarketAxess Holdings Inc’s (MKTX) PE Ratio Warrant A Sell?

MarketAxess Holdings Inc (NASDAQ:MKTX) is currently trading at a trailing P/E of 46.9x, which is higher than the industry average of 17.9x. While MKTX might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for MarketAxess Holdings

Breaking down the P/E ratio

NasdaqGS:MKTX PE PEG Gauge Nov 25th 17
NasdaqGS:MKTX PE PEG Gauge Nov 25th 17

A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for MKTX

Price-Earnings Ratio = Price per share ÷ Earnings per share

MKTX Price-Earnings Ratio = $187.98 ÷ $4.01 = 46.9x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MKTX, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. MKTX’s P/E of 46.9x is higher than its industry peers (17.9x), which implies that each dollar of MKTX’s earnings is being overvalued by investors. Therefore, according to this analysis, MKTX is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that MKTX should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to MKTX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MKTX, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MKTX to are fairly valued by the market. If this does not hold true, MKTX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in MKTX. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.

Are you a potential investor? If you are considering investing in MKTX, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on MarketAxess Holdings for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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