A month has gone by since the last earnings report for Interactive Brokers Group, Inc. IBKR. Shares have added about 14.8% in the past month, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Interactive Brokers Q3 Earnings Beat as Revenues Improve
Interactive Brokers’ third-quarter 2017 adjusted earnings of 43 cents per share surpassed the Zacks Consensus Estimate of 37 cents. Also, earnings were 43% above the prior-year quarter figure of 30 cents.
Results benefited from improvement in revenues, lower operating expenses and a rise in DARTs while lower trading volume was the undermining factor. Further, Electronic Brokerage segment continued to perform decently and divestiture of the company’s U.S. options market making business acted as a tailwind.
Comprehensive net income available to common shareholders amounted to $32 million or 44 cents per share, up from $20 million or 30 cents per share in the prior-year quarter.
Rise in Revenues, Lower Costs Support Results
Total net revenues jumped 23% year over year to $426 million. The rise was primarily driven by significant increase in commission fees and interest income, partially offset by a decline in trading gains (down 71%). The figure beat the Zacks Consensus Estimate of $375 million.
Total non-interest expenses fell 2% from the year-ago quarter to $158 million. The decrease was mainly due to lower general and administrative costs, and absence of consumer bad debt.
Income before income taxes came in at $268 million in the quarter, surging 46% year over year. Similarly, pre-tax profit margin was 63% compared with 53% in the prior-year quarter.
Segment Performance Improve
Electronic Brokerage: Net revenues increased 27% year over year to $367 million. Pre-tax income rose 13% to $142 million. Total DARTs for cleared and execution-only customers were 695,000, up 14% from the year-ago quarter. Pre-tax profit margin improved to 61% from 56% in the prior-year quarter.
Market Making: Net revenues plunged 30% year over year to $30 million. Pre-tax income was $11 million, up 57% from the year-ago quarter. The improvement was mainly driven by decline in operating costs, as the company completed the winding down of its U.S. options market making business. The segment’s results included a $10 million net recovery of exit costs. Pre-tax profit margin improved to 37% from 16% in the prior-year quarter.
Moreover, the Corporate segment reported net revenues of $29 million, significantly up from $14 million in the year-ago quarter. Pre-tax income was $32 million, up drastically from $14 million in the prior-year quarter.
Capital Position Strengthens
As of Sep 30, 2017, cash and cash equivalents (including cash and securities set aside for regulatory purposes) totaled $25.6 billion compared with $25.9 billion as of Dec 31, 2016. As of Sep 30, 2017, total assets amounted to $59.8 billion compared with $54.7 billion as of Dec 31, 2016. Total equity was $6.3 billion compared with $5.8 billion at the end of December.
While increase in the Fed funds target rates will be beneficial on net interest income (NII), Interactive Brokers expects to produce an additional $12 million in NII for the following four quarters with another 25 basis points rise in overnight interest rates.
As part of its plan to discontinue its options market making activities, management expects to incur a total of $25 million as one-time restructuring costs. Further, as a result of this restructuring, the company expects that nearly $40 million (up from $39 million as previously guided) in net expenses annually will be absorbed by the Electronic Brokerage segment.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.
Interactive Brokers Group, Inc. Price and Consensus
Interactive Brokers Group, Inc. Price and Consensus | Interactive Brokers Group, Inc. Quote
At this time, Interactive Brokers's stock has a poor Growth Score of F, however its Momentum is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Estimates have been trending upward for the stock and the magnitude of this revision looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.
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