MarketAxess: A "Bond" Stock
03/18/2005 12:00 am EST
In 2003, Eric Roseman recommended buying shares of the publicly traded Chicago Mercantile Exchange, which have since risen five-fold. Now, he sees an opportunity in a company that provides an electronic trading platform for bonds. Here’s his review of MarketAxess.
"MarketAxess Holdings (MKTX NASDAQ) operates one of the leading platforms for electronic trading of corporate and other types of fixed-income securities. It trades corporate debt in the US and Europe, emerging market bonds, US Treasury securities, and high-yield bonds. Its client base is mainly institutional, including hedge funds and other big trading outfits. MarketAxess eliminates the middleman in bond trading by seeking the best execution rates from its universe of trading counter parties, including giant dealers such as Bank of America Securities, ABN Amro and Barclays, to name just a few. Depending on what type of security its clients seek, MKTX then secures the best bid and ask price for execution.
"In a way, you could say that MarketAxess is the bond-trading version of Expedia or Travelocity, the online travel firms that offer consumers the best deals on airfare, hotels, and car rentals. It's a great gimmick that makes money by allowing the consumer to compare rates, and in this case, save bond-trading commissions by employing MKTX to outsource the lowest possible rate. I think it's brilliant. Total revenues for the fourth quarter of 2004 increased 14% to $19.7 million with net income rising 55%. For the year ending December 31, 2004, MarketAxess earned net income of $58.6 million versus just $4.2 million in 2003.
"Meanwhile, MKTX is making significant inroads in European fixed-income trading, and that is the future of its margins for the next few years. In contrast to the US, where fixed-income spreads continue to narrow for all types of securities, European bond markets offer far greater values. MarketAxess Holdings saw bond commissions surge 112% for its European bond platform in 2004 compared to 2003. Overall, the firm is providing a key service that is unique in the US and abroad. The company has a strong cash position, growing earnings from a rapidly expanding customer base, and should witness strong growth from European bond trading in 2005.
"The stock went public last fall and immediately soared to a high of $24.41. The good news for vultures like us seeking high value is that the stock subsequently tanked and is now more than 50% off its high. I think the momentum players bid the stock to the moon following its IPO last fall, and then fled the trade after the stock peaked in December. The way I see it, MarketAxess Holdings is a terrific buy at this price. If the trend in online bond trading continues for the leading company in this field, then it's the closest thing to ‘money in the bank’ by 2007. I believe we can expect 100% profits over the next 24 months."