A Member of Pat McKeough’s Inner Circle recently asked for his advice on Interactive Brokers Group Inc.
Pat likes the firm’s solid track record of growing revenues and earnings. It’s a market leader and its global presence should help it weather a recession. However, Pat notes that online stock brokerage is a highly competitive industry with few long-term winners.
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Interactive Brokers Group Inc. (Symbol IBKR on Nasdaq; www.interactivebrokers.com), is a technology-driven U.S. online stockbroker.
The company makes money from client trading, interest from client cash, and other revenue sources and investments. In all, it provides trade execution on more than 150 global markets in 33 countries and 26 currencies—all on one platform.
The company dates back to 1977 when Thomas Peterffy started a market-making business on the American Stock Exchange. Market makers are firms or individuals that engage in two-sided markets of a given security. A market maker seeks to profit off of the difference in the bid-ask spread. At the same time, market makers in a financial market help keep up the functionality of the market by infusing liquidity.
Interactive Brokers’ goal from the start was to automate the broker-dealer functions for securities trading through its exclusive software. The company is now one of the lowest-cost providers of broker-dealer services, handling significant trading volumes through automation.
Interactive owns 24.8% of IBG LLC, the holding company for its various businesses. The other 75.2% is held by IBG Holdings LLC, which Peterffy and other employees of Interactive Brokers control.
Interactive invests 56% of idle client cash in Treasury securities that mature within three months. The remaining 44% is held in bank deposits at the world’s largest banks.
The company’s 2.92 million clients worldwide have $497.2 billion in assets with Interactive. Its account base is also geographically diversified, with 38% from the Asia/Pacific region; 31%, the Americas; and 31%, Europe.
Inner Circle: Both revenues and earnings surge due to additional customers
Meanwhile, in the three months ended June 30, 2024, Interactive’s revenue increased 23%, to $1.23 billion from $1.0 billion a year earlier. Excluding one-time items, it earned $1.76 a share, in the quarter—33.4% higher than $1.32 a share a year earlier. The company also reported a 28% increase in customer accounts to 2.92 million. Commission revenue, net interest income, and fees and services income rose by 26%, 14% and 45%, respectively.
The shares currently yield 0.8% while trading at 17.4 times forecast earnings.
Going forward, Interactive should continue to be one of the leaders in its niche. The company’s primary aim has been to execute trades on a variety of securities better than its competitors. At the same time, it doesn’t offer investment banking or other advisory services.
Its tight focus has attracted many hedge funds and sophisticated investors to its platform. Plus, Interactive pays a much higher interest rate to customers on their cash positions; it also charges a lot less for buying stocks on margin. This has attracted a growing number of sophisticated buyers who frequently trade a variety of securities.
Still, the company operates in a highly competitive industry—one that is constantly evolving.
Recommendation in Pat’s Inner Circle: Interactive Brokers Group Inc. is a hold.
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