Winding Down Market Making Operations Costs Interactive Brokers Its Market Perform Rating At Wells Fargo

Interactive Brokers Group, Inc. IBKR could face challenges in the near term, with the winding down of its Market Making operation and growth in commissions, and the stock could come under pressure “during this transition period,” especially since the consensus EPS estimates appear too aggressive, Wells Fargo’s Christopher Harris said in a report.

Harris downgrades Interactive Brokers from Market Perform to Underperform, while reducing the valuation range from $35–$39 to $30–$34, with the new range implying an 8-percent downside risk at the midpoint. The analyst expressed optimism, however, regarding the company’s business model and long-term prospects.

Wind-Down To Cause Disruption

Interactive Brokers decided to wind-down its Market Making operation due to its sub-par returns for a number of years. Harris believes that the wind-down would result in lost revenue as well as the company having to retain at least 20 percent of the unit’s costs pro forma for the wind-down.

“We estimate the combination of these things will lead to EPS dilution of 6 percent. We expect IBKR to use the capital at the Market Maker to support Brokerage growth, a long-term positive but perhaps a near-term disappointment to some investors that valued the Market Maker at its stated book value,” the analyst commented.

Harris lowered the EPS estimate for 2018 from $1.67 to $1.55.

Related Links:

A Deep Dive Into Interactive Brokers Decision To Cease Market Making Operations