Zacks_Analysts' Blog : Interactive Brokers Beats Again - Analyst Blog

Interactive Brokers Group, Inc.’s (IBKR) fourth quarter 2011 earnings per share came in at 30 cents, substantially ahead of the Zacks Consensus Estimate of 23 cents. This also compared favorably with a loss of 67 cents in the year-ago quarter. During third quarter, the company earned twice the Zacks Consensus Estimate.

Including the effect of changes in the U.S. dollar value of Interactive’s non-U.S. subsidiaries, the company reported earnings of 27 cents compared with a loss of 56 cents in the year-ago quarter. This reflects the new GAAP convention that requires the posting of currency translation results contained in Other Comprehensive Income as part of reportable earnings.

Results benefited mainly from a substantial improvement in revenues, partially offset by higher interest and non-interest expenses. Net income attributable to non-controlling interests was also substantially higher during the reported quarter. The company’s Electronic Brokerage and Market Making segments continued to perform well with an impressive pre-tax income.

For the full year 2011, earnings were $1.40 per share, well above the Zacks Consensus Estimate of $1.05. This also compared favorably with a loss of 22 cents in the year-ago quarter.    

Quarter in Detail

Net revenue increased 65% year over year to $307.9 million. The growth was primarily driven by a boost in trading gains (up 261% year over year to $150.5 million), higher commissions and execution fees (up 13% over the year-ago quarter to $109.9 million) and a rise in interest income (up 30% year over year to $68.4 million). Net revenues also surpassed the Zacks Consensus Estimate of $275.0 million.

For the full year, net revenue increased 47% year over year to $1.4 billion. The Zacks Consensus Estimate for the full year was $1.2 billion.

Net income (before income taxes and minority interest) was up 272% on a year-over-year basis at $156.0 million. Pre-tax profit margin was 51% compared with 22% in the prior-year quarter.

Total non-interest expenses increased 5% from the year-ago quarter to $151.9 million. Execution and clearing expenses increased 2%, while General and administrative expense increased 44%.

Segment Performance

Market Making: Net revenue increased 278% year over year to $166.1 million. Pre-tax income came in at $92.3 million compared with a loss of $23.8 million a year ago. Pre-tax profit margin increased to 56% from negative 54% in the prior-year quarter.

Electronic Brokerage: Net revenue increased 14% year over year to $166.4 million. Pre-tax income came in at $86.6 million, up 16% from $74.7 million a year ago. Pre-tax profit margin increased to 52% from 51% in the prior-year quarter. Total daily average revenue trades (DARTs) increased 20% year over year to 447,000.

Capital Position                                                               

Consolidated equity capital as of December 31, 2011 was $4.72 billion compared with $4.22 billion as of December 31, 2010.

Our Viewpoint

Though Interactive’s fundamentals remain strong with a liquid balance sheet, sturdy capital base and high barriers to entry, we remain concerned about the Market Making segment s ability to consistently generate sufficient returns to fund dividend payment. However, continued strong performance of its brokerage business and quarterly dividend restoring were impressive. 

Interactive Brokers currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, the company’s peer Knight Capital Group Inc. (KCG) retains a Zacks #3 Rank (short-term Hold rating).