MarketAxess Holdings Inc. MKTX has been in investors’ good books owing to its consistent operating performance, launch of new services and the recent acquisition of Liquidity Edge, which further increases optimism about its long-term growth prospects.
The company’s strong operating capability as evident from its earnings performance appears impressive. The company has surpassed estimates in two of the past 14 reported quarters. The most recent earnings beat of 1.14% came on the back of higher revenues driven by increase in total trading volumes.
Year to date, the stock has gained 70%, dwarfing the industry’s growth of 16.1%. The stock has also performed better than other companies in the same space such as CME Group Inc. CME, CBOE Global Markets, Inc. CBOE and Intercontinental Exchange, Inc. ICE, that have risen 5.6%, 17.7% and 21%, respectively, over the same time frame.
Factors Supporting the Stock’s Rally
Rising Trading Volumes: The company’s total trading volumes have been increasing over the years and the same rose 24% in the first nine months of 2019. This also led to an increase in the company’s market share to 18.8% for the nine months ended September 2019 from 17.6% for the nine months ended Sep 30, 2018. Investments in technology, launch of new trading platforms and acquisitions have driven this growth.
Strong Capital Position: MarketAxess’ inherent strength can be gauged by its solid balance sheet position and continuous generation of cash flows. Increase in free cash flows and absence of any debt have enabled business investments. Also, consistent dividend increase, for the past consecutive 10 years, makes it a sought-after company for dividend investors.
Superior Operating Profit: MarketAxess’ trailing 12-month return on equity (ROE) reinforces its growth potential. The company’s ROE of 31% is higher than the ROE of 12% for the industry, reflecting tactical efficiency in using shareholders’ funds.
Factors Likely to Drive the Stock Further
New business initiatives taken by the company to build a sustainable long-term growth trajectory will drive its stock.
Launch of Live Markets: In October, the company launched Live Markets with a pilot group of investor and dealer clients. The company is getting good response for this new protocol. This coupled with the growing adoption of automated trading strategies underscores the need for a protocol that offers live order-driven liquidity for both investors and dealers.
Launch of Portfolio Trading Solution: The company is also actively building new portfolio trading capabilities, which is an enhancement to its existing list trading capabilities. The portfolio trading solution will be launched soon. It will help in trading large fixed income portfolios, including unique customized portfolios, as well as the creation or redemption of fixed income ETFs.
Acquisition of Liquidity Edge: Last week, the company completed the acquisition of LiquidityEdge, a leading U.S. treasuries trading venue. This acquisition brings streaming treasury liquidity and trading capabilities to MarketAxess. This deal provides the dealers with a strategic opportunity to grow business by building custom dealer to client connections, which the company expects to launch in the first half of 2020. The acquisition also supports further expansion of the company’s treasury hedging capabilities with the first phase of these enhancements set to launch later in the fourth quarter.
Investment in Automated Trading Functionalities: The company continues to invest in automated trading functionalities by developing a new liquidity provisioning solution. This new auto responder tool will allow investors to automatically respond to request for liquidity via anonymous Open Trading marketplace based on a set of pre-defined rules and criteria. Portfolio managers and their traders will be able to automatically monitor and react to unique pricing opportunities across their portfolios, thus enhancing transaction cost savings for all investors. The company expects the new enhancement to launch this month.
MarketAxess sports a Zacks Rank #1 (Strong Buy) and has witnessed an upward revision in 2019 earnings estimates of 1.7% over the past 30 days. This indicates analysts’ positive sentiment over the stock. You can see the complete list of today’s Zacks #1 Rank stocks here.
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