Interactive Brokers: Navigating Turbulent Waters

Jan.26.09 | About: Interactive Brokers (IBKR)

Interactive Brokers Group, Inc. (NASDAQ:IBKR) reported earnings last week and the stock sold off nearly 12%. It appears that even though the company reported record fourth quarter profits, investors were still concerned about the risk in financial stocks. This risk is certainly nothing to take lightly as evidenced by the demise of many “blue chip” competitors such as Bear Stearns, Lehman Brothers and Merrill Lynch. However, Interactive Brokers may be facing an unfair stereotype.

Looking at the past year, the company reported earnings of $2.24 per share, an increase of 41% over 2007 earnings. The number of cleared “DARTS” (a measure for average revenue trades) was up by 46%. According to Thomas Peterffy, the CEO, IBKR’s “focus on long-term growth, controlling risk, and building technology continues to pay dividends.” I would have to agree that the performance of this company appears to stand head and shoulders above the competition.

Skeptics can certainly point to some mistakes over the past year. In one particular instance, IBKR lost $10 million because of a customer who somehow slipped through security measures and was able to take on too much risk. When the customer’s account was wiped out, IBKR was responsible for additional losses unable to be covered by the diminished equity in the customer account. Mistakes like this can be very costly and have the potential to pull down an entire brokerage. But this event probably did more good than harm in that it allowed for a careful inspection of the technology, and probably left the systems in a much more stable place. Margin requirements will be much more closely monitored so the chances of another event like this happening are probably very low.

One other issue that should ease investor concerns is the type of securities traded by IBKR and its customers. The company has decided to only be involved in exchange listed securities, which cuts down on the amount of illiquid and risky assets. It also gives the company a chance to more quickly sell customer assets if margin levels are not met. It may be that IBKR is bypassing some potential profits by only trading listed securities, but the lower risk profile is certainly a positive factor for investors.

IBKR has a strong balance sheet that will allow for stability and growth in the coming year. Of particular note is the planned expansion of its market making business in Asia. The company will leverage its current position in India to add more products covered, and the addition of some Japanese markets will also add to revenue. Currently the company operates in 70 market centers which represent 27 countries and 16 different currencies.

With the stock trading in the mid teens, and earnings expected at $2.15 this coming year, it appears the value is solid. Interactive Brokers has proven its ability to navigate turbulent markets by growing profits even during the past difficult year. Since the stock is near the lowest level in its history, investors likely have the chance to own a quality company at a significant discount. Even if the company began trading at a multiple of 10 by the end of the year, investors would see a 35% gain. IBKR is one of the positions in the ZachStocks Growth Model and should perform well during the coming quarters.

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IBKR Notes

Disclosure: Author does not have a position in IBKR.