Interactive Brokers Group, Inc. (NASDAQ:IBKR) shares are up more than 7.87% this year and recently increased 0.30% or $0.19 to settle at $63.87. GAIN Capital Holdings, Inc. (NYSE:GCAP), on the other hand, is down -34.30% year to date as of 02/13/2018. It currently trades at $6.57 and has returned -2.38% during the past week.
Interactive Brokers Group, Inc. (NASDAQ:IBKR) and GAIN Capital Holdings, Inc. (NYSE:GCAP) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect IBKR to grow earnings at a 16.90% annual rate over the next 5 years. Comparatively, GCAP is expected to grow at a 19.00% annual rate. All else equal, GCAP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 8.13% for GAIN Capital Holdings, Inc. (GCAP). IBKR’s ROI is 66.70% while GCAP has a ROI of 11.40%. The interpretation is that IBKR’s business generates a higher return on investment than GCAP’s.
Cash is king when it comes to investing. On a percent-of-sales basis, IBKR’s free cash flow was 0% while GCAP converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, GCAP is able to generate more free cash flow for investors.
IBKR’s debt-to-equity ratio is 0.03 versus a D/E of 0.45 for GCAP. GCAP is therefore the more solvent of the two companies, and has lower financial risk.
IBKR trades at a forward P/E of 27.32, a P/B of 4.14, and a P/S of 13.58, compared to a forward P/E of 8.73, a P/B of 1.05, and a P/S of 0.84 for GCAP. IBKR is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. IBKR is currently priced at a 2.73% to its one-year price target of 62.17. Comparatively, GCAP is -26.35% relative to its price target of 8.92. This suggests that GCAP is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.30 for IBKR and 2.50 for GCAP, which implies that analysts are more bullish on the outlook for IBKR.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. IBKR has a beta of 0.97 and GCAP’s beta is 0.18. GCAP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. IBKR has a short ratio of 3.84 compared to a short interest of 3.46 for GCAP. This implies that the market is currently less bearish on the outlook for GCAP.
GAIN Capital Holdings, Inc. (NYSE:GCAP) beats Interactive Brokers Group, Inc. (NASDAQ:IBKR) on a total of 10 of the 14 factors compared between the two stocks. GCAP is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, GCAP is the cheaper of the two stocks on an earnings, book value and sales basis, GCAP is more undervalued relative to its price target. Finally, GCAP has better sentiment signals based on short interest.