MarketAxess Investments Inc. MKTX has been under pressure this year so far as investors turned bearish on the stock due to low trading volumes. The stock has lost 16.1% year-to-date after rising 50% in 2020.
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Estimates are slowing down
Even analysts are not bullish on the stock and have lowered the company’s 2021 and 2022 earnings estimates. Over the past 30 days the same has been revised downward by 1.2% and 1%, respectively.
Decrease in trading volumes
The main source of income for the company is the commissions generated by the bonds traded on its platform and therefore the transaction volumes executed and traded on its platform are of utmost importance. This is where the business is facing the pain now.
MarketAxess’ total trading volume for the second quarter decreased 8.3% year-on-year and 17% sequentially. This is explained by the decline in bond trading. There has been a deceleration in overall credit market activity from last year’s levels due to the economic disruption caused by the pandemic. This impacted its commission income, which fell 9.1% year over year in the second quarter.
The Company’s bond trading business thrives when credit spread volatility increases. Last year, the volatility of credit spreads was greater than this year and the credit spreads of high quality bonds were also wider. Widening credit spreads means more risk in the market, which is when bonds look more attractive. Last year it also witnessed huge corporate debt issuances. These factors led to an increase in bond trading, which in turn contributed to the growth in volumes, revenues and profits of the company.
Long-term growth history intact
MarketAxess is credited with revolutionizing the traditional method of bond trading by introducing automated trading. The bond market has lagged behind other stock markets and stock markets in terms of adoption of electronic trading. Even now, most bond trading is done and settled over the phone.
Company founder Richard McVey saw early on an opportunity to make bond markets efficient by automating the bond trading system. Via its automated trading platform, it allows bonds to be traded electronically. The Company is the premier electronic trading network for the US institutional credit products market. It is also growing rapidly outside the country and has operations in Europe, UK and Singapore. It is also investing in the Asia-Pacific region.
This global expansion provides the company with ample room for growth in the $ 100,000 billion global fixed income market awaiting electronic transformation.
The various acquisitions of MarketAxess completed the organic growth. The buyout of Liquidity Edge provided the company with an attractive entry point into the US Treasury bill market. The MuniBrokers buyout expanded MarketAxess’ existing municipal bond trading solutions for global institutional investors and broker clients. The purchase of the Regulatory Reporting Hub extended post-trade reporting and pre-trade and post-trade data services to a wider European clientele, particularly in Germany, France and the Nordic countries.
The company’s advancement with commodities, a superior financial model, a large and growing addressable market, significant operating leverage as well as an expanded suite of electronic trading protocols prepare it for long-term growth.
Short-term softness and high valuation
The long-haul outlook for MarketAxess looks good with the right product lineup in place to deliver the solutions the credit markets need. However, shrinking trading volumes could put earnings under pressure, which in turn could drag the stock down.
Other stocks in the same space, including Tradeweb Markets Inc. TW, CME Group Inc. FMC and Cboe World Markets, Inc. The CBOE gained 40%, 9.5% and 34.4% respectively over the same period.
From a valuation perspective, the stock looks overvalued. Its 12-month forward price-to-earnings ratio of 57.83 is well above the S&P 500’s 26.72. The same is also above the five-year median of 46.39.
So, until the business volumes of the company strengthen, we must avoid stocks.
He currently wears a Zacks Rank # 5 (strong sell).
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