MKTX Stock Study (10-4-23)

I recently studied MarketAxess Holdings, Inc. (MKTX) with a closing price of $204.76. The original study is here.

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 recently trending lower from 44.9% in ’13 to 51.8% in ’16 to 47.1% in ’22 with a last-5-year mean of 49.9%.

Also over the past decade, ROE leads peer and industry averages going from 23.8% in ’13 to 29.5% in ’19 then decreasing to 24.6% in ’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 900 while Quick Ratio is 2.3. 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 7.6% YOY and 10.2% per year for ’23 and ’22-’24 (based on 10 analysts).
• YF projects YOY 5.8% and 12.6% for ’23 and ’24, respectively (12 analysts).
• Zacks projects YOY 6.6% and 12.7% for ’23 and ’24, respectively (6).
• Value Line projects 12.0% annualized growth from ’22-’27.
• CFRA projects 6.2% YOY and 9.4% per year for ’23 and ’22-’24, respectively (11).
• M* gives a 2-year ACE of 7.8% per year and projects 8.7% per year for the next five years (analyst note).

The estimates have come down since last quarter. I am forecasting near the bottom of the range at 7.0% per year.

With regard to EPS growth:

• CNN Business projects 7.8% YOY and 12.2% per year for ’23 and ’22-’24, respectively (based on 10 analysts), along with 5-year annualized growth of 10.7%.
• MarketWatch projects 10.7% per year for both ’22-’24 and ’22-’25 (13 analysts).
• Nasdaq.com projects 11.4% and 10.7% for ’23-’25 and ’23-’26 [5, 6, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 10.7%.
• YF projects YOY 4.8% and 16.4% for ’23 and ’24, respectively (13), along with 5-year annualized growth of 12.2%.
• Zacks projects YOY 6.0% and 15.6% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 10.6%.
• Value Line projects 13.0% annualized growth from ’22-’27.
• CFRA projects 4.7% YOY and 10.8% per year for ’23 and ’22-’24, respectively (8).
• M* projects long-term annualized growth of 9.7%.

My 8.0% forecast is below the range of six long-term estimates (mean 11.1%). I will use ’22 EPS of $6.65/share as the initial value, which is very close to 2023 Q2 EPS of $6.71 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E ranges from 39.6 (’13) to 62.1 (’22) with a last-5-year mean of 71.0. The last-5-year-mean average P/E is 54.9. I am forecasting below the range and closer to the current P/E of 30.5.

My Forecast Low P/E is 24.0. Over the past decade, low P/E ranges from 18.9 (’13) to 32.7 (’22) with a last-5-year mean of 38.8. The last-10-year median is 33.9. I am forecasting near the bottom of the range (only ’13 is lower).

My Low Stock Price Forecast (LSPF) of $192.90 is default based on $6.65/share initial value. This is 22.1% less than the previous closing price and 20.2% less than the ’21-’23 low.

Over the past decade, Payout Ratio ranges 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 on the BUY threshold with a U/D ratio of 3.0. Total Annualized Return (TAR) is 11.6%.

PAR (using Forecast Average—not High—P/E) of 8.0% 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 53 studies (my study and 21 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.2%, 12.3%, 50.0, 33.7, and 34.2%, respectively. I am lower across the board. Value Line’s projected average P/E of 40.0 is lower than MS (41.9) and much higher than mine (28.5).

MS high / low EPS are $12.02 / $6.67 versus my $9.77 / $6.65 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $12.25. I am lowest of the three.

MS LSPF of $209.40—invalid on today’s date—implies a Forecast Low P/E of 31.4: less than the above-stated 33.7. MS LSPF is 6.8% less than the default $6.67/share * 33.7 = $224.78, which is also invalid on today’s date. MS LSPF is a whopping 31.2% greater than mine.

My TAR (over 15.0% preferred) is less than the 21.7% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 2.7 and 3.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is extremely undervalued at 0.56.

MKTX is a BUY under $205. With a forecast high price of $342, TAR should meet my 15% criterion around $171/share.