MarketAxess Holdings Inc (MKTX, Financial) has experienced a daily gain of 4.41% and a 3-month loss of -16.99%. Despite this, the company's Earnings Per Share (EPS) (EPS) stands at a healthy 6.71. This raises the question: Is MarketAxess Holdings significantly undervalued? This article delves into a detailed valuation analysis of the company to provide an answer. Let's explore.
Introduction to MarketAxess Holdings Inc (MKTX, Financial)
Founded in 2000, MarketAxess Holdings is a leading electronic fixed-income trading platform that connects broker/dealers and institutional investors. The company primarily focuses on credit-based fixed-income securities with its main trading products being U.S. investment-grade and high-yield bonds, Eurobonds, and Emerging Market corporate debt. Recently, the company has expanded more aggressively into Treasuries and municipal bonds with the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. The company also provides pre- and post-trade services with its acquisition of Regulatory Reporting Hub from Deutsche Börse Group in 2020 adding to its product offerings.
The company's current stock price is $242.84, with a market cap of $9.10 billion. However, the GF Value, an estimation of fair value based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates, stands at $396.92. This discrepancy suggests that MarketAxess Holdings might be significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line gives an overview of the fair value that the stock should be traded at.
According to the GF Value calculation, MarketAxess Holdings appears to be significantly undervalued. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. Given its current price and market cap, MarketAxess Holdings indicates a clear undervaluation.
Because MarketAxess Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength of MarketAxess Holdings
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's crucial to carefully review the financial strength of a company before deciding whether to buy its stock. A great starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage.
MarketAxess Holdings has a cash-to-debt ratio of 5.21, which is better than 59.05% of companies in the Capital Markets industry. GuruFocus ranks the overall financial strength of MarketAxess Holdings at 9 out of 10, indicating strong financial health.
Profitability and Growth of MarketAxess Holdings
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. MarketAxess Holdings has been profitable 10 years over the past decade. Over the past twelve months, the company had a revenue of $733 million and an EPS of $6.71. Its operating margin is 44.35%, which ranks better than 80.76% of companies in the Capital Markets industry. Overall, the profitability of MarketAxess Holdings is ranked 10 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of MarketAxess Holdings is 12.3%, which ranks better than 59.71% of companies in the Capital Markets industry. However, the 3-year average EBITDA growth rate is 12.2%, which ranks worse than 50.32% of companies in the Capital Markets industry.
Return on Invested Capital vs. Weighted Average Cost of Capital
Another way to assess a company's profitability is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, MarketAxess Holdings's ROIC is 31.56, and its WACC is 9.56.
Conclusion
In conclusion, the stock of MarketAxess Holdings appears to be significantly undervalued. The company's financial condition is strong, and its profitability is robust. However, its growth ranks worse than 50.32% of companies in the Capital Markets industry. To learn more about MarketAxess Holdings stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
