Interactive Brokers (IBKR) Up 8.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Interactive Brokers (IBKR). Shares have added about 8.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Interactive Brokers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Interactive Brokers Q4 Earnings Lag on Lower Revenues

Interactive Brokers’ fourth-quarter 2018 earnings per share of 57 cents missed the Zacks Consensus Estimate of 59 cents. The figure compares favorably with the prior-year quarter’s adjusted earnings of 43 cents.

Results were adversely impacted by decline in revenues and higher expenses. However, the Electronic Brokerage segment continued to perform decently and acted as a tailwind. Also, the company witnessed an increase in daily average revenue trades (DARTs).

Interactive Brokers reported comprehensive income available to common shareholders of $43 million or 56 cents per share against comprehensive loss of $2 million or 2 cents per share in the prior-year quarter.

For 2018, earnings of $2.28 per share beat the Zacks Consensus Estimate of $2.11. Also, it was above 2017 adjusted earnings of $1.53. The company reported comprehensive income available to common shareholders of $156 million or $2.09 per share, up from $87 million or $1.22 per share reported in 2017.

Revenues Decline, Expenses Rise

Total net revenues for the reported quarter decreased 4.5% year over year to $492 million. The fall was primarily due to lower trading gains, decline in other income and higher interest expenses. Also, the figure lagged the Zacks Consensus Estimate of $497 million.

Total net revenues for 2018 were $1.90 billion, up 11.8%. However, the figure lagged the Zacks Consensus Estimate of $1.92 billion.

Total non-interest expenses jumped 21.2% from the year-ago quarter to $183 million. The rise in all components except communications costs were the reasons for the increase.

Income before income taxes was $309 million in the quarter, down 15.1% from the prior-year quarter. Pre-tax profit margin was 63%, down from 71%.

Quarterly Segment Performance

Electronic Brokerage: Net revenues increased 25.6% year over year to $490 million. Pre-tax income rose 23.4% to $311 million. Total DARTs for cleared and execution-only customers were 951,000, up 30% from the year-ago quarter. Pre-tax profit margin declined to 63% from 65%.

Market Making: Net revenues were $17 million, down 32% from the prior-year quarter. Pre-tax income was $9 million, up 12.5% year over year. Pre-tax profit margin was 53% compared with 32% in the year-ago quarter.

The Corporate segment reported negative revenues of $15 million against revenues of $100 million in the year-ago quarter. Pre-tax loss was $11 million against pre-tax income of $104 million a year ago.

Strong Capital Position

As of Sep 30, 2018, cash and cash equivalents (including cash and securities set aside for regulatory purposes) totaled $25.7 billion compared with $22 billion as of Dec 31, 2017. As of Dec 31, 2018, total assets amounted to $60.5 billion compared with $61.2 billion as of Dec 31, 2017. Total equity was $7.2 billion compared with $6.4 billion at the end of December 2017.

Outlook

As the increase in the Fed funds target rates will benefit net interest income (NII), Interactive Brokers expects to produce an additional $15.5 million in NII over the next four quarters, with another 25 basis points rise in overnight interest rates.

Management expects fixed expenses to increase 10-15% in 2019.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -5.08% due to these changes.

VGM Scores

At this time, Interactive Brokers has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Interactive Brokers has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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