MarketAxess Holdings Inc. MKTX delivered second-quarter earnings of $1.77 per share, beating the Zacks Consensus Estimate by 6% but declining 20% year over year.
Like earnings, revenues of $176.3 million showed a year-over-year decline of 5%. The same, however, beat the Zacks Consensus Estimate by 0.3%.
Soft Trading Volumes Pull Down Revenues
Bond trading volumes of this operator of electronic bond trading platform suffered low levels of credit market volatility. It was a very tough year-over-year comparison as last year, credit spread volatility was greater and credit spreads in high-grade were also wider.
Credit spread widening means higher risks involved in the market, which is when bond looks more attractive. In 2020, the company witnessed huge debt issuance by corporates. These factors expanded bond trading, which in turn, aided volumes, revenues and earnings growth of the company.
With the economic revival this year, bond trading somewhat tapered down. In the June quarter, trading volumes declined 9.8% to $668.9 billion in total credit category. Rates trading was down 7% to $888.3 billion. MarketAxess entered rates trading in 2019 through its acquisition of LiquidityEdge, an electronic U.S. Treasuries marketplace.
The company earns commission and fees revenues on the trades executed on its platforms. Thus, lower trading volume weighed on its commission and fees revenues, which constitute 90% of its revenues. Commission revenues fell 9.1% to $156.4 million. Commission revenues included $1.1 million generated by MuniBrokers, which was acquired in April 2021.
All other revenues (10% of total revenues), which consist of information services, post-trade services and other revenues, soared 57% year over year to $19.9 million. The jump was mainly owing to $3.8 million of regulatory trade reporting revenues generated by Regulatory Reporting Hub, which was acquired from Deutsche Börse Group in November 2020. A weaker dollar compared to the U.K pound resulted in revenue gains of $1.3 million.
High Expenses Weigh Down Margins
While revenues declined, operating expenses rose 10.5% to $89.2 million, creating pressure on the margins. Investment in the company’s growth initiatives including geographic expansion, trading automation, new trading protocols and the transition to self-clearing shot up expenses.
Consequently, operating margin shrank 700 basis points year over year to 49.4%.
Our Take
Despite near-term headwinds, long-term growth for MarketAxess looks alluring. The company has the credit of revolutionizing the way bond trading was carried out traditionally by bringing in automated trades.
Via its automated trading platform, MarketAxess allows bonds to be traded electronically. It is the leading electronic trading network for the institutional market in U.S. credit products. The company is also rapidly expanding outside the United States and has businesses in Europe, the U.K and Singapore.
Its various acquisitions also complemented its inorganic growth. The acquisition of the Regulatory Reporting Hub expanded MarketAxess’ post-trade reporting and pre- and post-trade data services across a broader European client base, particularly in Germany, France and the Nordics.
The electronic trading market share is growing but is still in early stages of market penetration, which provides the company with ample scope for growth in the $100-trillion global fixed income market that is still awaiting electronic transformation.
The company’s solid growth in core products, superior financial model, a large and increasing addressable market, significant operating leverage and an expanded suite of electronic trading protocols poise it well for the long haul.
There are no doubts about the company’s long-term prospects as its products are rightly placed to provide the much-needed solutions for the credit markets. But from a valuation perspective, the stock looks overpriced. Its forward 12-month price-to-earnings ratio of 54.97 is way higher than the S&P 500’s 21.62. It is also above the 5-year median of 45.81. Thus, until the company’s business volumes gain strength, we should steer clear of the stock.
The stock carries a Zacks Rank #4 (Sell) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Year to date, the stock has lost 19.3% against its industry’s growth of 14.6%. However, other securities exchange companies in the same space, namely Tradeweb Markets (NASDAQ:TW) Inc. TW, Cboe Global Markets (NYSE:CBOE), Inc. CBOE and CME Group Inc. (NASDAQ:CME) CME have rallied 39%, 24.1% and 14.6%, respectively, during the same time frame.
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