MarketAxess Holdings Inc. (NGS: MKTX). MarketAxess continues to benefit from increased activity and transparency in the fixed-income markets, and recent results have been solid. In 3Q20, MKTX reported strong revenues and operating income versus the prior-year quarter, though EPS fell sequentially from a record 2Q. On valuation, the stock is trading at 75-times our 2020 EPS estimate and 73-times our 2021 estimate, well above the multiples of other exchange operators. As such, we believe that a HOLD rating is appropriate. We will look for a pullback toward peer average valuations as an opportunity to raise our rating.
The stock received a boost in 2Q19 when it was added to the S&P 500 index.
Revenue rose 25% to $164 million, driven by corporate bond issuance and credit spread volatility. Over 1600 client firms are now connected to the company’s Open Trading platform.
During the quarter, the company launched Live Markets, an institutional two-way credit order platform. The platform is designed to provide liquidity in the new issue market and in the most actively traded bonds. Goldman Sachs became the first dedicated market maker, offering prices on over 100 liquid corporate bonds.
Mid-X, an anonymous matching engine, was launched to provide cost savings for clients willing to execute at the midpoint of the bid/ask range. The service, used by both investors and dealers, is meant to complement Live Markets.
The company also announced the acquisitions of MuniBrokers and Deutsche Borse Regulatory Reporting Hub. MuniBrokers will add liquidity to the muni market and trade data that will expand the MarketAccess muni bond data suite. The Deutsche Borse Regulatory Reporting Hub will add several hundred European clients and increase transparency in European bond trading data.
In November 2019, the company acquired LiquidityEdge for $150 million. LiquidityEdge provides electronic trading services for U.S. Treasuries, allowing users to seamlessly hedge their trades. In 3Q20, LiquidityEdge, which now operates as MarketAxess Rates, contributed approximately $4.2 million in U.S. Treasury trading commissions.
EARNINGS & GROWTH ANALYSIS
In 3Q20, MKTX generated more than 92% of its earnings from commissions, with the remainder coming from information, post-trade, and ‘other’ services.
The company’s Open Trading platform represented 44% of total transaction volume in 3Q20. Average daily volume increased 40% to $3.1 billion, with over 1600 unique trading firms. The platform provides liquidity and tighter bid-ask spreads, significantly reducing transaction costs for bond traders. In 3Q, MKTX become self-clearing, allowing for greater cost savings in the post-trade settlement process. MKTX’s trading share of the high-grade market rose to 18.8% in 3Q20 from 18.0% in 3Q19. Executed algorithmic trades rose 42% to 325,000.
The company is planning to launch a new Portfolio Trading service. The service will help institutional investors to efficiently manage large customized portfolios.
Total expenses rose 16% to $76.1 million in 3Q.
FINANCIAL STRENGTH & DIVIDEND
MKTX currently has no debt. The operating margin rose to 53.5% in 3Q20 from 50.1% in the prior-year quarter, but fell from 56.3% in 2Q20.
MarketAxess has a buyback program, but did not repurchase any stock in 3Q20.
MANAGEMENT & RISKS
MarketAxess was founded in April 2000 by Richard McVey. Mr. McVey has served as chairman and CEO since that time. Chris Concannon was named president and COO in January 2019. He was previously the president of CBOE Global Markets and the CEO of BATS Global Markets.
MarketAxess also faces continued pressure to lower costs for clients, and increasing competition from other exchanges. One competitor, Tradeweb (TW), went public in 2Q19, while ICE and LSE plan to expand their bond trading platforms.
MarketAxess Holdings operates a global electronic trading platform, primarily for corporate bonds and other fixed-income instruments. The company enables institutional investors and broker-dealers to anonymously trade securities and also offers clearing and market data services. The company has approximately 560 employees.
On valuation, MKTX is trading at 75-times our 2020 EPS estimate and 73-times our 2021 estimate, well above the multiples of other exchange operators. As such, we believe that a HOLD rating remains appropriate. However, as the bond market becomes more ‘equity-like’ and competition from other trading platforms increases, we expect the valuation of MKTX to approach those of equity exchange operators such as NDAQ and ICE, which trade at an average 2020 P/E in the mid-20s.