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Why Is MarketAxess (MKTX) Down 12.3% Since Last Earnings Report?

A month has gone by since the last earnings report for MarketAxess (MKTX). Shares have lost about 12.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is MarketAxess due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

MarketAxess Q1 Earnings Beat on Growing Trading Volumes

MarketAxess reported first-quarter 2023 earnings per share of $1.96, which outpaced the Zacks Consensus Estimate by 3.7% and our estimate of $1.86. The bottom line advanced 13.3% year over year. Its shares gained 2.3% in the pre-market trading session due to the outperformance.

Total revenues improved 9% year over year to a record $203.2 million in the quarter under review. The top line surpassed the consensus mark by 1.4% and our estimate of $200.2 million.

The quarterly results were driven by growing commissions as a result of higher trading volumes and robust estimated market share gains across most of its credit product categories. However, the lower duration of U.S. high-grade bonds, leading to reduced total credit average variable transaction fee per million, when combined with an elevated expense level, partly offset the upside.

Quarterly Operational Update

Commission revenues rose 9.6% year over year to $182 million in the first quarter, higher than our estimate of $180.5 million. Information services' revenues registered a record $11 million, up 12.2% year over year on the back of strong net new data contract revenues. The metric surpassed the Zacks Consensus Estimate of $10.6 million and our estimate of $10.1 million. Meanwhile, post-trade services revenues of $10 million inched up 1% year over year in the quarter under review.

MarketAxess’ U.S. high-grade trading volume climbed 14.8% year over year to $392.7 billion. Rising by the same year-over-year percentage, the average daily volume (ADV) of the same product category amounted to $6,334 million, higher than our estimate of $6,025.4 million but lagged the consensus mark of $6,414 million.

Other credit trading volume of $28,683 million rose 50.4% year over year, whereas ADV of the same product category jumped 50% year over year to $462 million in the first quarter.

The emerging markets’ trading volume and ADV inched up 1.1% each on a year-over-year basis. Trading volume and ADV of MKTX’s Eurobonds rose 25.8% and 23.8%, respectively, year over year.

Total credit trading volume advanced 14.6% year over year to $854.5 billion in the quarter under review, while ADV of the same product category registered a record $13,721 million (up 14.3% year over year). However, both total rates’ trading volume and ADV declined 4% year over year.

Total expenses of $107.8 million escalated 10.1% year over year but lagged our estimate of $108.8 million. Year-over-year growth was due to increased employee compensation and benefits, technology and communication expenses, and marketing costs.

MarketAxess reported an operating income of $95.4 million, up 8.2% year over year in the first quarter and surpassed our estimate of $91.4 million.

Balance Sheet (as of Mar 31, 2023)

MarketAxess exited the first quarter of 2023 with cash and cash equivalents of $332.8 million, which tumbled 22.7% from the 2022-end figure. Total assets of $1,628.5 million increased 1.3% from the level in 2022 end.

It had no outstanding borrowing under its credit facility in 2022-end. Total stockholders’ equity rose 3.7% from the figure as of Dec 31, 2022, to $1,121.5 million.

Solid Cash Flows

MarketAxess generated cash from operations of $7.5 million in the first quarter. Cash used in operations totaled $23.7 million in the prior-year quarter. Free cash flows of $43.8 million climbed 28.9% year over year.

Dividend Update

Management approved a quarterly cash dividend of 72 cents per share, which will be paid out on May 24, 2023, to shareholders of record as of May 10, 2023.

2023 Guidance

Management anticipates expenses between $418 million and $446 million for this year, the mid-point of which indicated a 10% increase from the 2022 reported figure.

Capital expenditure was estimated between $52 million and $58 million for 2023.

The effective tax rate is likely to be 25-26%.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, MarketAxess has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, MarketAxess has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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