Capital Markets company MarketAxess is taking Wall Street by surprise today, falling to $198.76 and marking a -3.5% change compared to the S&P 500, which moved -0.0%. MKTX is -15.66% below its average analyst target price of $235.67, which implies there is more upside for the stock. However, the average analyst rating for the stock is hold -- a more pessimistic outlook than you might expect. Over the last year, MarketAxess has underperfomed the S&P 500 by -49.7%, moving -26.5%.
MarketAxess Holdings Inc., together with its subsidiaries, operates an electronic trading platform for institutional investor and broker-dealer companies worldwide. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
MarketAxess's trailing 12 month P/E ratio is 29.1, based on its trailing EPS of $6.82. The company has a forward P/E ratio of 25.1 according to its forward EPS of $7.92 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the finance sector has an average P/E ratio of 15.89, and the average for the S&P 500 is 27.65.
To better understand MKTX’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
MarketAxess’s PEG is 3.8, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in MarketAxess's free cash flow, which was $324.44 Million as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $282.71 Million and they've been growing at an average rate of 8.0%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in MKTX have received an annualized dividend yield of 1.4% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Marketaxess's P/B ratio is 5.72 -- in other words, the market value of the company exceeds its book value by a factor of more than 5, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.76 as of the second quarter of 2024.
MarketAxess is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its strong operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into MKTX's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
