MKTX Stock Study (7-6-23)

I recently did a stock study on MarketAxess Holdings, Inc. (MKTX) with a closing price of $258.38.

M* writes:

     > Founded in 2000, MarketAxess is a leading electronic fixed-income
     > trading platform that connects broker/dealers and institutional
     > investors. The company is primarily focused on credit based fixed
     > income securities with its main trading products being U.S.
     > investment-grade and high-yield bonds, Eurobonds, and Emerging
     > Market corporate debt. Recently the company has expanded more
     > aggressively into Treasuries and municipal bonds with the
     > acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021,
     > respectively. The company also provides pre- and post-trade
     > services with its acquisition of Regulatory Reporting Hub from
     > Deutsche Börse Group in 2020 adding to its product offerings.

Over the past decade, this small-size company has grown sales and EPS at annualized rates of 14.2% and 18.2%, respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’21 and ’22. PTPM leads peer and industry averages while trending lower recently from 44.9% (’13) to 51.8% (’16) to 47.1% (’22) with a last-5-year mean of 49.9%.

Over the past decade, ROE also leads peer and industry averages while going from 23.8% (’13) to 29.5% (‘190 then decreasing to 24.6% (’22) with a last-5-year mean of 28.3%. Debt-to-Capital is much lower than peer and industry averages as the company has no debt (uncapitalized leases only): last-5-year mean is 7.0%.

Interest Coverage is over 500 while Quick Ratio is 2.2. M* gives an Exemplary rating for Capital Allocation and Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 10.3% YOY and 11.3% per year for ’23 and ’22-’24 (based on 10 analysts).
• YF projects YOY 10.3% and 12.4% for ’23 and ’24, respectively (13 analysts).
• Zacks projects YOY 11.1% and 12.5% for ’23 and ’24, respectively (6).
• Value Line projects 12.6% annualized growth from ’22-’27.
• CFRA projects 10.4% YOY and 11.3% per year for ’23 and ’22-’24, respectively (12).
• M* gives a 2-year ACE of 11.7% per year along with 11.1% per year from ’21-’26 (analyst note).

I am forecasting near the bottom of the range at 10.0%.

With regard to EPS growth:

• CNN Business projects 11.7% YOY and 13.7% per year for ’23 and ’22-’24, respectively (based on 10 analysts), along with 5-year annualized growth of 13.5%.
• MarketWatch projects 13.9% and 13.5% per year for ’22-’24 and ’22-’25, respectively (14 analysts).
• Nasdaq.com projects 11.5% and 12.6% for ’23-’25 and ’23-’26 [5, 4, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 13.5%.
• YF projects YOY 12.3% and 15.8% for ’23 and ’24, respectively (14), along with 5-year annualized growth of 13.5%.
• Zacks projects YOY 13.0% and 13.7% for ’23 and ’24, respectively (5).
• Value Line projects 13.9% annualized growth from ’22-’27.
• CFRA projects 12.0% YOY and 14.4% per year for ’23 and ’22-’24, respectively (9).
• M* projects long-term annualized growth of 13.6%.

The mean of five long-term estimates is 13.6% per year but three being identical makes me suspicious of data duplication. Regardless, I am forecasting below the range. I will use ’22 EPS of $6.65/share as the initial value rather than ’23 Q1 EPS of $6.90 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E has ranged from 37.4 in ’14 to 87.0 in ’21 with a last-5-year mean of 71.0. The last-5-year-mean average P/E is 54.9. I am forecasting [at upper end of my comfort zone] below the range.

My Forecast Low P/E is 29.0. Over the past decade, low P/E has ranged from 18.9 in ’13 to to 50.4 in ’21 with a last-5-year mean of 38.8. The last-10-year median is 33.9. I am forecasting below the latter [’13, ’14 (24.0), and ’15 (26.0) are lower].

My Low Stock Price Forecast (LSPF) is the default $192.90 based on $6.65/share initial value. This is 25.3% less than the previous closing price and 11.3% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 28.7% in ’13 to 42.1% in ’22 with a last-5-year mean of 37.2%. I am forecasting below the range at 28.0%.

These inputs land MKTX in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 8.2%.

PAR (using Forecast Average—not High—P/E) of 6.4% is less than I seek for a small-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 44 studies over the past 90 days (my study + 14 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.9%, 12.5%, 53.0, 34.1, and 34.0% respectively. I am lower across the board. Value Line projects an average annual P/E of 40.0, which is lower than MS (43.6) but higher than mine (32.0).

MS high/low EPS is $12.32/$6.72 vs. my $10.71/$6.65 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $229.30 implies a Forecast Low P/E of 34.1: an exact match to that cited above. MS LSPF remains 18.9% greater than mine.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. PEG = (current P/E) / (forecast EPS growth rate) = 38.0 / 10.0 = 3.8 (1.5 is generally regarded as an upper limit) while Relative Value (M* data) is 0.69. The former (latter) suggests the stock to be overvalued (undervalued).

I would look to re-evaluate MKTX under $238/share.