US Bonds And X-Pro Automation Will Open New Markets

Key Takeaways

• Strong growth in U.S. bonds and diversification in markets and products are key drivers of anticipated revenue growth.
  
• Investment in technology and strategic trading innovations aim to boost operational efficiency and market presence.
  
• Challenges in U.S. credit markets and margin pressures from portfolio trading might hinder revenue growth, while tax reserve issues and reduced liquidity could affect financial stability.

Catalysts

Operates an electronic trading platform for institutional investor and broker-dealer firms in the United States, the United Kingdom, and internationally.

• MarketAxess is seeing strong growth in U.S. government bonds driven by increased trading velocity and institutional use of rate algorithms during volatile periods, which may boost future revenue streams.
  
• Product and geographic diversification with growth in international markets, emerging markets, municipal bonds, and U.S. government bonds are expected to drive revenue growth, particularly through new algo suites and enhanced RFQ solutions.
  
• The continued investment in technology, particularly the rollout of X-Pro and increased automation, is expected to improve operational efficiencies, potentially impacting net margins positively.
  
• Strategic initiatives to enhance U.S. credit market share, particularly through new block and portfolio trading innovations, are likely to expand market presence and revenue.
  
• Opportunistic share repurchases, which extend beyond offsetting dilution from stock-based compensation, are expected to enhance earnings per share (EPS) in the future.

MarketAxess Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MarketAxess Holdings's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 33.6% today to 35.6% in 3 years time.
• Analysts expect earnings to reach $373.2 million (and earnings per share of $10.08) by about May 2028, up from $274.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, down from 31.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

MarketAxess Holdings Future Earnings Per Share Growth

Risks

• MarketAxess experienced a 2% decline in commission revenue, driven by lower fee per million and market share in U.S. credit, indicating potential challenges in generating consistent revenue growth.
  
• Despite positive international expansion, MarketAxess faces a decline in U.S. credit market share, which could impact overall revenue if not addressed.
  
• Commission fee capture pressures are anticipated from the growth of lower-margin portfolio trading, potentially affecting net margins.
  
• The ongoing establishment of a tax reserve based on a recent court ruling will increase their effective tax rate, impacting earnings negatively.
  
• Cash and equivalents decreased due to stock repurchases and incentive compensation payments, potentially affecting liquidity and future capital investments.

Valuation

• The analysts have a consensus price target of $232.75 for MarketAxess Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $295.0, and the most bearish reporting a price target of just $185.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $373.2 million, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $228.88, the analyst price target of $232.75 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.