Interactive Brokers: Maintaining Hold Recommendation

Interactive Brokers Group’’s (IBKR) second quarter diluted earnings of $0.44 per share (down 33.3% sequentially, but up 57.1% compared to the prior-year quarter) were six cents short of our estimate.

The results were impacted mainly by the 32.6% sequential decline in market making segment’s net revenues (due to subdued market volatility), while the brokerage segment’s net revenues were down 3.0% compared to the prior quarter. The company continued to maintain a highly liquid balance sheet with low leverage, and a strong capital position. After reviewing the results, we are moderating our EPS estimates and six-month target price for IBKR, while maintaining our Hold recommendation on the shares.

IBKR is currently trading at 13.4 times the consensus estimate for FY08, a 4% premium to 12.9 times for the peer group median. On a price-to-book basis, the shares trade at 2.34 times, which is at par with the peer group median. We would however not place much value on peer analysis as IBKR does not have a good peer group.

Our six-month target price of $29.00 per share equates to about 14.2 times our forward estimate for FY08. With no dividend to supplement, this target price implies a 5.8% expected total return over the same period. Additionally, the quantitative Zacks Rank for IBKR is currently 3, indicating no clear directional pressure on the shares over the near term. Short interest is currently 12.0 days versus 8.7 days previously.

Kalyan Nandy contributed to the report.

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