Author Topic: IBKR - Interactive Brokers  (Read 169313 times)

frommi

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Re: IBKR - Interactive Brokers
« Reply #190 on: January 29, 2016, 10:37:10 AM »
I thought the company was deemphasizing its market making.  Why do you say that all earnings are being reinvested in that business?

If I remember correctly, they are taking 10% of equity out of the MM unit per year, so if it earns less than 10% ROE, it'll shrink to nothing over time, but if it earns more than that, it'll keep going.

But the broker side is growing so much faster than the MM that over time the MM will become relatively less important even if it doesn't shrink in absolute numbers.

That's my understanding, anyway.

Maybe i misunderstood something, wouldn`t be the first time. But then what do they do with the money they earn for me in the brokerage business?


rpadebet

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Re: IBKR - Interactive Brokers
« Reply #191 on: January 29, 2016, 10:45:01 AM »
There is excess regulatory capital...
they hope to invest it in developing compliance systems globally to gain more customers and open up markets for existing customers. That will be a moat someday. It isn't easy for a new entrant to suddenly replicate all the complex regulations across the globe.

IBKR is to the brokerage industry what GIECO was to the auto insurance industry a few decades ago. Unfortunately it isn't required by law that everyone have a brokerage account :), that's pretty much the only difference in the model.
You can't connect the dots looking forward you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something: your gut, destiny, life, karma, whatever.
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KCLarkin

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Re: IBKR - Interactive Brokers
« Reply #192 on: January 29, 2016, 10:57:08 AM »
What make you think he is wrong?

I like his work but he makes some very curious assumptions. As others have mentioned:
1. Terminal PE = 15. Schwab has averaged 27.7x over the last 15 years, so why 15x?
2. Assumes 50% margins vs 60% margins the last two years. Operating leverage should result in higher margins, not lower.
3. Market maker has $1.7 B in equity. Why do we ignore this value?
3b. ignores dividends in his return calculation
4. Tax rate of 35% seems high given the international operations.
5. Are there other growth opportunities (price increases, new products, better NIM)?

So, if you assume significant multiple compression, falling margins, higher taxes, and a write-off of the market making unit...then the returns will be mediocre.

flesh

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Re: IBKR - Interactive Brokers
« Reply #193 on: January 29, 2016, 11:21:05 AM »
What make you think he is wrong?

I like his work but he makes some very curious assumptions. As others have mentioned:
1. Terminal PE = 15. Schwab has averaged 27.7x over the last 15 years, so why 15x?
2. Assumes 50% margins vs 60% margins the last two years. Operating leverage should result in higher margins, not lower.
3. Market maker has $1.7 B in equity. Why do we ignore this value?
3b. ignores dividends in his return calculation
4. Tax rate of 35% seems high given the international operations.
5. Are there other growth opportunities (price increases, new products, better NIM)?

So, if you assume significant multiple compression, falling margins, higher taxes, and a write-off of the market making unit...then the returns will be mediocre.

Ya the guys valuation was horrid..... he's was right on the qualitative factors, interesting what makes a market.

They pay around 10% in tax and in the recent ec the cfo said they can continue in that range through some loophole for a long long time. Take his valuation and use a 15% tax rate and an 18 exit multiple and add some fcf earned on the cash piling up from the diff between 35 and 15% tax rate and you have a very nice result.

Q - Chris Harris

And then a quick question on the P&L. You guys have run this fairly low tax rate for some period of time and I'm just trying to think for modeling purposes is it fair to sort of use this sub 10% GAAP tax rate on a go forward basis or is there some benefit that rolls off that we should be thinking about for future quarters?

A - Thomas Peterffy

Paul?

A - Paul Brody

Well yes the original benefit embedded in the IPO transaction is a 15 year benefit and our IPO was in 2007, that kind of benefit, though we have nothing planned, that kind of benefit would be increased in renewed with each additional of any secondary offerings where the sale price was in excess of essentially the book value really the tax cost basis but call it the book value that is what generates that tax benefit, so each one of those is a 15 year amortization, so last for quite a well.

A - Thomas Peterffy

Paul that includes employees selling unregistered shares also, right?

A - Paul Brody

Yes, each time shares are sold into the public.

A - Thomas Peterffy

And including bonus shares right?

A - Paul Brody

Not including bonus shares.

A - Thomas Peterffy

Not including bonus shares. Okay so the shares that are originally owned shares that become a newly registered, yes?

A - Paul Brody

Yes, correct.

Q - Chris Harris - Wells Fargo Securities


OK, thanks for clarifying.
« Last Edit: January 29, 2016, 11:37:37 AM by flesh »

benhacker

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Re: IBKR - Interactive Brokers
« Reply #194 on: February 01, 2016, 02:55:45 PM »
What did you think of the results? I really appreciate your thoughts on IBKR.

Hey Kab, I don't have any great insights.  I thought the results were so-so.  As always, I feel quite confident in the investment after hearing the conference call.  They way they think about the business and the long run economics seem still compelling to me, even if the valuation, while better, isn't a screaming statistical bargain.

I think results will continue to trend in the right direction and I still think IB has a lot of optimizations in their business, and ways their can accelerate their share grab.  I continue to think the industry is in for a long run of consolidation, and IB seems to have a path to begin monetizing some competitors business and eroding their market position without being forced to buy them which I think is good.  Their market growth in RIAs and HFs is interesting, but I also really like some of the network effect aspects of their model that are falling into place (marketplace, etc).

Money quote from the call that made me smile:

Quote
Rob Koehn

Okay, okay. So I guess maybe last question. To what extent, and I probably know the answer to this, but to what extent do you ever – how often do you think about raising prices? I mean, I know for me as a customer –

Thomas Peterffy

I think about it almost every day and I always say I will never do it.

Rob Koehn

Okay. I mean, I think there are a lot of people out there that have nowhere else to go, and so they might –

Thomas Peterffy

I don’t want to be like Oracle.
Ben Hacker
Beaverton, Oregon - USA

kab60

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Re: IBKR - Interactive Brokers
« Reply #195 on: February 01, 2016, 04:11:30 PM »
That one made me smile as well - espescially the next part where the analyst obviously didn't understand the reply. :) Thanks for the comment, I agree with your points but have so far waited for a better entry. Maybe it's silly when you consider their ability to increase prices. They have a long term focus but there is lots of optionality.

rpadebet

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Re: IBKR - Interactive Brokers
« Reply #196 on: February 01, 2016, 04:29:20 PM »
That one made me smile as well - espescially the next part where the analyst obviously didn't understand the reply. :) Thanks for the comment, I agree with your points but have so far waited for a better entry. Maybe it's silly when you consider their ability to increase prices. They have a long term focus but there is lots of optionality.

As long as they have customer accounts to gain, I don't think they need to raise prices. It could be a lot of years before they reach that point.

I like how they are licensing their technology and backend to other brokers. They are making themselves indispensable to the system and further strengthening their moat by doing so. This is a much better method than directly trying to compete with them for "less sophisticated" retail accounts.
You can't connect the dots looking forward you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something: your gut, destiny, life, karma, whatever.
                       - Steve Jobs

kab60

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Re: IBKR - Interactive Brokers
« Reply #197 on: February 02, 2016, 02:08:23 AM »
That one made me smile as well - espescially the next part where the analyst obviously didn't understand the reply. :) Thanks for the comment, I agree with your points but have so far waited for a better entry. Maybe it's silly when you consider their ability to increase prices. They have a long term focus but there is lots of optionality.

As long as they have customer accounts to gain, I don't think they need to raise prices. It could be a lot of years before they reach that point.

I like how they are licensing their technology and backend to other brokers. They are making themselves indispensable to the system and further strengthening their moat by doing so. This is a much better method than directly trying to compete with them for "less sophisticated" retail accounts.
Agreed. My point was that valuing them on current earnings is silly because they're kept low to gain additional accounts which probably have more long term value. So it's just my own valuation technique that needs to be refined, but I'm really not good at valuing growth. And I agree on the whilelabel/licensing strategy - I think that's brilliant and one of the options I like, but it could take a long time to play out.

JBTC

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Re: IBKR - Interactive Brokers
« Reply #198 on: February 03, 2016, 06:11:20 AM »
Lots of comparisons have been made from the technical/user standpoint between IB, Fido and SCHW.

I am wondering if someone can compare IB and SCHW from an investing point of view. Clearly the model is different and they go after different customers. Both have been owned by value investors. Lou Simpson has a lot of SCHW.

Are there any merits SCHW has that IB doesn't?


KJP

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Re: IBKR - Interactive Brokers
« Reply #199 on: February 03, 2016, 07:03:34 AM »
Lots of comparisons have been made from the technical/user standpoint between IB, Fido and SCHW.

I am wondering if someone can compare IB and SCHW from an investing point of view. Clearly the model is different and they go after different customers. Both have been owned by value investors. Lou Simpson has a lot of SCHW.

Are there any merits SCHW has that IB doesn't?

To me, Schwab is a different animal than IB.  It's not only that the customer profile is different (though there is overlap), but Schwab is also at least as much a money manager as a broker, and it also operates a bank.  One possible result of that business model is that Schwab could benefit more from higher interest rates:  http://brooklyninvestor.blogspot.com/2015/08/the-charles-schwab-corporation-schw.html