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Interactive Brokerage Group - A Perpetual Call Option with a 2.8% Yield

October 09, 2012 | About:
The golden age of brokerage firm profitability ended with the bear market of 2008. Shell-shocked investors retreated from stocks and have never fully returned.

A firm that could grow assets, customer accounts and trading volume in that environment must be doing something, or everything, right.

That’s exactly what IBKR has done. They’ve established themselves as the low-cost provider of high-quality services for financial professionals and hard-core traders.

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The latest monthly report showed growth in most areas. DARTs were down year over year but up nicely from August. The 410,000 average for September was higher than all previous years except 2011.

IBKR serves an elite group.

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IBKR garners scant analyst coverage. Despite a solid dividend yield and a sterling balance sheet, their under-the-radar shares do not reflect the improved fundamentals. The Oct. 8, 2012. close of $14.28 isn’t far above the all-time low set in March 2009.

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The chart above shows the high points from the past five years. A $1.79 per share special dividend was paid in December 2010. The current quarterly distribution is $0.10 per share.

At today’s quote you get an industry world leader at just under 11.3x the 2013 Zacks estimate of $1.27 per share. That’s a 52.4% discount to their May 2007 IPO price even though book value has increased significantly since.

The shares have rallied occasionally along with the overall market. IBKR touched $17.49 earlier this year simply on the ebullient mood last spring. It may not look like much on the chart, but a rebound to that price represents a 22.4% gain from $14.28.

If it takes another year to get back only to that level you’ll have north of 25% in total return on this surprisingly low-beta stock. That price target was met or exceeded during each quarter of 2010 and the first two of 2011.

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Imagine what could happen if we get into a nice rally mode once again. There have been periodic "going private" rumors with the stock price at these depressed levels. It might not happen but it gives IBKR some extra speculative appeal.

Chairman and CEO Thomas Peterfly controls the votes. Any deal with outsiders would have to meet with his approval. A move by him to go private would need to obtain a fairness opinion. I can’t imagine obtaining that on any bid for less than $18 to $22 based on IBKR’s past trading history and its current book value.

Fiat money is being devalued by our Fed and central banks around the world. Smart money is going into income producing assets that can be marked up as currencies are gradually being inflated away.

IBKR shares offer decent yield and, in essence, a perpetual call option on either much higher earnings or a potential sale of the company.

It’s my guess that IBKR shareholders will get nice returns one way or the other.

The trade: Buy IBKR shares at $14.28 with a minimum goal price of $17 to $20

Disclosure: Long IBKR shares

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.5/5 (21 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 1 year ago


IBKR paid out $1.10 per share on Dec. 28th- a one dollar special and their ordinary 10-cent distribution.

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