(By Rich Bieglmeier) Interactive Brokers Group Inc. (IBKR) is expected to report earnings after the market closes on Tuesday, December 15, 2013. Wall Street anticipates that IBKR will earn $0.22 for its 4th quarter. iStock expects the industrial goods maker will report earnings that will miss Wall Street's consensus number. The iEstimate is $0.17 – a 5 cents downside surprise.
Interactive Brokers operates as an automated electronic broker and market maker. It engages in routing orders; and executing and processing trades in securities, futures, foreign exchange instruments, bonds, and mutual funds on approximately 100 electronic exchanges and trading venues worldwide. The company also provides bid and offer quotations on approximately 867,000 securities and futures products listed on electronic exchanges. In five words, it is a discount broker.
Trading the broker's earnings have been a fairly simple task, be on the right side of the surprise and the stock tends to head that way. IBKR has failed to live up to the consensus estimate in 11 of the last 16 quarters. On 10 of the occasions, Interactive shareholders lost value with the stock dropping an average of 7.37%; max -20.10%, min +0.20%.
On the flip side, shares gained ground in the days surrounding bullish beats 100% of the time. The handful of better than expected report cards have returned an average of 8.34%; max +18.30%, min +3.30%.
Speculative options traders appear to betting against the upcoming EPS announcement. Open interest for January put options for near or in the money contracts total 4,453. Meanwhile, calls add up to 2,891. Contrarians might find the bearish bias to be a reason to trade the upside of Tuesday's news.
A few metrics are highly important for discount trading firms like Interactive. Two of the most important include Daily Average Revenue Trades (DARTs) and margin balances. Charging fees for trading and margin interest are two of the major drivers for earnings and revenue. Rising DARTs and margin balances usually translate into higher earnings and profits.
For October, November and December, DARTs are down approximately 5.5% year-over-year. Reduced DARTS to translate in lower market making, customer trading, options contracts, and cleared trades i.e. most of the services Interactive Brokers offers its clients. iStock wouldn't be surprised to see annualized Net Revenue per Account fall to $3,250 ish, down from $3,435 a year ago, but a slight improvement from the third quarter's $3,216.
Meanwhile, margin balances have increased by roughly 37%, ending December at $9.8 billion, which could help offset some of the negatives associated with declining trading volume, along with an increase in customer accounts.
Analysts covering IBKR appear to be concerned with the quarter's results as three have lowered their expectations since the start of 2013 by an average of a nickel. It's been our experience that a rash of downward revisions on the eve of earnings usually points to disappointing results, not always, but most of the time.
Although our iEstimate is below the street's consensus, DARTs analysis hints that a positive surprise is possible. Investors who want to trade Interactive Brokers Group, Inc. (IBKR) earnings might consider buying an even number of January 14.71 calls and puts. The call contract last traded for 5 cents, and the put for 60 cents. That means the stock will have to move roughly 65 cents for investors to break even.
Using the average past performance as our guide, a bearish surprise could take shares as low as $13.19, and a bullish surprise up to $15.42, both moves exceed our hypothetical 65 cents threshold.