MKTX Stock Study (7-3-24)

Posted by Mark on August 18, 2024 at 06:29 | Last modified: July 3, 2024 11:06

I recently studied MarketAxess Holdings, Inc. (MKTX) with a closing price of $193.80. Previous studies are here and 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 10 years, this small-size company has grown sales and EPS at annualized rates of 13.2% and 15.5%, respectively. Lines are mostly up, parallel, and flattening except for EPS dips in ’21 and ’22.

Over the past decade, PTPM leads peer and industry averages while recently trending lower from 45.1% in ’14 to 51.8% in ’16 to 44.2% in ’23 with a last-5-year mean of 48.7%. ROE leads peer and industry averages going from 22.5% in ’14 to 29.5% in ’19 then decreasing to 21.8% in ’23 with a last-5-year mean of 26.7%. 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 8.2%.

Quick Ratio is 2.2 and Interest Coverage is 153. M* assigns the company a “Wide” economic moat and gives an “Exemplary” rating for Capital Allocation. Value Line gives a Financial Strength grade of A.

With regard to sales growth:

• YF projects YOY 8.6% and 10.6% for ’24 and ’25, respectively (based on 14 analysts).
• Zacks projects YOY 9.4% and 11.5% for ’24 and ’25, respectively (7 analysts).
• Value Line projects 11.3% annualized growth from ’23-’28.
• CFRA provides ACE of 8.1% YOY and 9.3% per year for ’24 and ’23-’25, respectively (13).
• M* gives a 2-year ACE of 8.3% per year and projects in analyst note “just under 9%” through ’28.

I am forecasting below the range at 7.0% per year.

With regard to EPS growth:

• MarketWatch projects 11.4% and 11.6% per year for ’23-’25 and ’23-’26, respectively (based on 16 analysts).
• Nasdaq.com projects 12.7% and 11.4% per year for ’24-’26 and ’24-’27, respectively [8/3/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha (SA) projects 4-year annualized growth of 3.1%.
• YF projects YOY 1.3% contraction and 13.1% growth for ’24 and ’25 along with 5-year annualized growth of 7.7% (15).
• Zacks projects YOY growth of 4.7% and 11.7% for ’24 and ’25 along with 5-year annualized growth of 5.6% (8).
• Value Line projects 10.4% annualized growth from ’23-’28.
• CFRA provides ACE growth of 2.6% YOY and 7.7% per year for ’24 and ’23-’25, respectively (11).
• M* projects long-term annualized growth of 10.1%.

My 4.0% per year forecast is near bottom of the 5-long-term-estimate range (mean 7.4%). Initial value is ’23 EPS of $6.85/share rather than 2024 Q1 EPS of $6.81 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E ranges from 37.4 in ’14 to 87.0 in ’21 with a last-5-year mean of 72.6. 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 28.5.

My Forecast Low P/E is 23.0. Over the past decade, low P/E ranges from 24.0 in ’14 to 50.4 in ’21 with a last-5-year mean of 37.1. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $155.00 is default based on initial value given above. This is 20.0% less than the previous closing price and 19.4% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 30.6% in ’20 to 42.1% in ’22 with a last-5-year mean of 38.3%. I am forecasting below the range at 30.0%.

These inputs land MKTX in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 9.4%.

PAR (using Forecast Average—not High—P/E) of 5.5% 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 15 studies (my study and 5 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 PR are 8.6%, 10.1%, 41.5, 29.8, and 37.7%, respectively. I am lower across the board. Value Line’s projected average P/E of 40.0 is higher than MS (35.7) and much higher than mine (29.0).

MS high / low EPS are $11.08 / $6.80 versus my $8.33 / $6.85 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS exceeds both at $11.25.

MS LSPF of $163.40 implies a Forecast Low P/E of 24.0: less than the above-stated 29.8. MS LSPF is 19.4% less than the default $6.80/share * 29.8 = $202.64 resulting in more conservative zoning. MS LSPF is 5.4% higher than mine, though.

With regard to valuation, PEG is 4.9 and 6.8 per Zacks and my projected P/E, respectively: substantially overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is substantially undervalued at 0.52.

MOS is robust in the current study. I am much lower than MS TAR of 18.9% although the small MS sample size limits importance of the comparison. My inputs are also near the bottom of or below respective analyst/historical ranges.

The SA estimate hurts stock prospects by lowering my forecast. Despite SA being so low, I don’t think my forecast is outlandish being less than 4% less than the analyst mean (and still above SA).

Per U/D, MKTX is a BUY under $191/share. The stock needs to fall to ~$146 to meet the BI TAR criterion given a forecast high price ~$292.