Interactive Brokers Group, Inc. · NASDAQ:IBKR
Interactive Brokers — New Constructs — Investor Presentation (2019)
51 slides from Interactive Brokers's investor presentation, 2019
Slide 1: ROIC: The Truth Behind the Numbers
ROIC: The Truth Behind the Numbers The Link Between Corporate Performance & Valuation Important Disclosure Information is contained on the last page of this report. The recipient of this report is directed to read these disclosures. david.trainer@newconstructs.com 615-377-0443 Confidential - New Con
Slide 2: Agenda
AGENDA 1. Why ROIC is important 2. Why don’t more people use ROIC? 3. How to calculate ROIC – at scale 4. Get diligent research – for free 5. Why you need protection now more than ever 2 - New Constructs, LLC Confidential 2
Slide 3: Part I: Why ROIC is important
Part I Why ROIC is important Confidential - New Constructs, LLC 3
Slide 4: What is the purpose of markets?
WHAT IS THE PURPOSE OF MARKETS? The purpose of capital markets is to allocate capital to its most efficient use • If this is true, then capital should flow to where it will earn the highest return • As a result, return on invested capital should (and does) drive valuations. Confidential - New Constr
Slide 5: Return on Invested Capital (ROIC)
RETURN ON INVESTED CAPITAL (ROIC) The Most Important Measure of Profitability • Return on Invested Capital (ROIC) is vital to value creation, see “Getting ROIC Right” from Ernst & Young. *This graph was created based on information collected and analyzed by New Constructs, LLC. New Constructs regula
Slide 6: Top investors prefer ROIC
TOP INVESTORS PREFER ROIC • 77% of buy-side investors say ROIC is an excellent or very good metric for linking executive pay to performance, more than any other metric. • Investors recognize ROIC is the truest measure of corporate performance Confidential - New Constructs, LLC 6
Slide 7: Part II: Why Don't More People Use ROIC?
Part II Why Don’t More People Use ROIC? Confidential - New Constructs, LLC 7
Slide 8: Calculating ROIC is hard
CALCULATING ROIC IS HARD Challenges of Accurately calculating ROIC People like the idea of ROIC, but few have the resources/expertise/will to calculate it in a diligent manner. Challenges in this process include: • Earnings Manipulation: CFO’s themselves say that 20% of companies intentionally misre
Slide 9: Calculating ROIC is hard: Previous Attempts
CALCULATING ROIC IS HARD Previous Attempts Confidential - New Constructs, LLC 9
Slide 10: Calculating ROIC is hard: Previous Attempts
CALCULATING ROIC IS HARD Previous Attempts • Enthusiasm for ROIC-based metrics declined as the Tech bubble elevated unprofitable and overvalued stocks. • Giants like Coca-Cola (KO) and AT&T (T) stopped using EVA after 1998. • “Consultant’s Concoction” meant metrics were proprietary, expensive, and d
Slide 11: Market is made mostly of speculators
MARKET IS MADE MOSTLY OF SPECULATORS Investor Population Has Changed Institutional Investor Categories Definitions: 1. Quasi-indexers - low turnover and small stakes 2. Transients - high turnover and small stakes 3. Dedicated - low turnover and large stakes Click here for a copy of the original arti
Slide 12: Speculation begets speculation
SPECULATION BEGETS SPECULATION Shorter Holding Periods for Stocks • Until mid-1960’s average holding period was 7 years. • Average holding period is <1 year and annual portfolio turnover is >100%1. Major Reactions to Quarterly Earnings • Stock prices make large moves in response to earnings surprise
Slide 13: Speculation begets speculation
SPECULATION BEGETS SPECULATION Unrealistic Expectations Become A Self-Fulfilling Prophecy High Fair Low High Low Investment Knowledge Confidential - New Constructs, LLC 13
Slide 14: Speculation begets speculation
SPECULATION BEGETS SPECULATION Speculation + Volatility = Dangerous Brew Speed Trumps Quality of Info High High Low Low High Low Investment Knowledge Confidential - New Constructs, LLC 14
Slide 15: Rise above record levels of noise
RISE ABOVE RECORD LEVELS OF NOISE Superior Research Gives You an Edge Confidential - New Constructs, LLC 15
Slide 16: Systematic diligence: find the dark corners
SYSTEMATIC DILIGENCE: FIND THE DARK CORNERS Exploit the Speculators and Short-termism Qualifiers Qualifiers Confidential - New Constructs, LLC 16
Slide 17: Part III: How to Calculate ROIC – At Scale
Part III How to Calculate ROIC – At Scale Confidential - New Constructs, LLC 17
Slide 18: Why diligence is needed
WHY DILIGENCE IS NEEDED Core Problem: GAAP is exploitable. Only Solution: Read the Footnotes and MD&A. Traditional P&L Economic P&L Revenues Revenues - operating expenses - operating expenses - Hidden Incomes/Charges = pretax earnings =pretax earnings - taxes - taxes = Reported Profit =Profit - capi
Slide 19: Getting ROIC right is not easy
GETTING ROIC RIGHT IS NOT EASY Scouring the Footnotes and MD&A of 10-Ks • Hidden Expenses/Income • Employee Stock Options • Unrecorded Goodwill • Option Valuation Assumptions • Impairments • Operating Leases • Unconsolidated Subsidiaries • Loan Loss/LIFO Reserves • Minority Interests • Pension Assum
Slide 20: Getting to the economics
GETTING TO THE ECONOMICS Measuring Key Results • NOPAT core operating earnings after-tax • Invested Capital all cash invested in the business • WACC rent management must pay for use of capital Return on Invested Capital = NOPAT/Avg Invested Capital Economic Earnings = (ROIC – WACC) * Invested Capita
Slide 21: Focus on economic earnings
FOCUS ON ECONOMIC EARNINGS (Unscrubbed) Earnings Trends Are Misleading “Look at the financial footnotes in 10-K filings and the gains then disappear” “Only 1 sector has experienced real earnings gains in the past 12 months” – MarketWatch.com 5/4/17 & 2/28/18 *This graph was created based on informat
Slide 22: Making money with ROIC: Winmark
MAKING MONEY WITH ROIC Winmark (WINA) – Made a Long Idea on 10/26/2017 Winmark (WINA) • ROIC had increased from 13% in 2006 to 44% in 2017 • Capital-light franchise model had led to significant growth • Stock was significantly undervalued compared to retail peers *This graph was created based on inf
Slide 23: Making money with ROIC: Winmark
MAKING MONEY WITH ROIC Winmark (WINA) – Made a Long Idea on 10/26/2017 Winmark (WINA) • ROIC continues to rise, up to 53% TTM • Reiterated our call on 10/24/2018 and still recommending • Stock is up 28% since our original Long Idea vs. S&P 500 up 16% *This graph was created based on information coll
Slide 24: How our ratings work
HOW OUR RATINGS WORK Based on 5 Criteria Confidential - New Constructs, LLC 24
Slide 25: The alternative to speculation
THE ALTERNATIVE TO SPECULATION Superior Research Gives You an Edge 3 Ways to Beat the Market - systematically Better Data - difficult and expensive to obtain • Gathering and analyzing data from the Notes to the Financial Statements provides a competitive advantage. Better Analysis - not just your ne
Slide 26: Part IV: Get Our Research – for free!
Part IV Get Our Research – for free! Confidential - New Constructs, LLC 26
Slide 27: Get research on economic earnings
GET RESEARCH ON ECONOMIC EARNINGS Compare reported vs economic results *This graph was created based on information collected and analyzed by New Constructs, LLC. New Constructs regularly gathers information from over 3,000 companies’ 10Ks, including the Notes to the Financial Statements and MD&A. C
Slide 28: See how economic earnings affect valuation
SEE HOW ECONOMIC EARNINGS AFFECT VALUATION Get more details on drivers of value *This graph was created based on information collected and analyzed by New Constructs, LLC. New Constructs regularly gathers information from over 3,000 companies’ 10Ks, including the Notes to the Financial Statements an
Slide 29: More rigor for smarter decisions
MORE RIGOR FOR SMARTER DECISIONS You deserve diligent fundamental research Confidential - New Constructs, LLC 29
Slide 30: More rigor for smarter decisions
MORE RIGOR FOR SMARTER DECISIONS You deserve diligent fundamental research Confidential - New Constructs, LLC 30
Slide 31: More rigor for smarter decisions
MORE RIGOR FOR SMARTER DECISIONS You deserve diligent fundamental research Confidential - New Constructs, LLC 31
Slide 32: Get our research on IBKR
GET OUR RESEARCH ON IBKR Find us on either platform Mosaic Classic Analyst Confidential - New Constructs, LLC 32 Source: Trader Workstation, Interactive Brokers Source: Trader Workstation, Interactive Brokers
Slide 33: Get our research on IBKR
GET OUR RESEARCH ON IBKR Pick New Constructs from menu Source: Trader Workstation, Interactive Brokers Confidential - New Constructs, LLC 33
Slide 34: Download any of our reports
DOWNLOAD ANY OF OUR REPORTS We cover 10,000+ stocks, ETFs and mutual funds Source: Trader Workstation, Interactive Brokers Confidential - New Constructs, LLC 34
Slide 35: Ernst & Young shows our rigor matters
ERNST & YOUNG SHOWS OUR RIGOR MATTERS White Paper: Investors Deserve Better Data • It’s not often that a big 4 accounting firm like E&Y features Click here for a copy. the material superiority of a research firm’s analytics. • The white paper provides specific examples for specific companies. • Goog
Slide 36: Powerful research automation has arrived
POWERFUL RESEARCH AUTOMATION HAS ARRIVED Technology Provides Only Solution Big Data Harvard Business School Case Study features our Research Automation technology. “Disrupting Fundamental Analysis with Robo-Analysts” Click here for a copy. Confidential - New Constructs, LLC 36
Slide 37: Part V: Why you need protection now more than ever
Part V Why you need protection now more than ever. Confidential - New Constructs, LLC 37
Slide 38: Filings getting longer & longer
FILINGS GETTING LONGER & LONGER Keeping Up With Disclosures Is Nearly Impossible *This graph was created based on information collected and analyzed by New Constructs, LLC. New Constructs regularly gathers information from over 3,000 companies’10Ks, including the Notes to the Financial Statements an
Slide 39: Disclosure trends are not your friend
DISCLOSURE TRENDS ARE NOT YOUR FRIEND More Data, More Noise, More Complexity • Filings have grown to 200+ pages (That’s longer than the average novel.) • Increasingly complex and time-consuming work • Accounting rules are constantly changing Confidential - New Constructs, LLC 39
Slide 40: Technology to close the research gap
TECHNLOGY TO CLOSE THE RESEARCH GAP Machine are better than humans at some things Confidential - New Constructs, LLC 40
Slide 41: Machine learning from experts
MACHINE LEARNING FROM EXPERTS Human-Validated Parsing Instructions from 140,000+ Filings Confidential - New Constructs, LLC 41
Slide 42: Appendix
Appendix Confidential - New Constructs, LLC 42
Slide 43: Success with high profile institutional clients
SUCCESS WITH HIGH PROFILE INSTITUTIONAL CLIENTS Self-Directed Clients Are Natural Fit for Simpler Products • Top hedge fund and institutional money managers • Top wealth management firms • Top advisors • Top accounting, insurance & consulting firms Harvard Business School & MIT Sloan Confidential -
Slide 44: How the wealth industry works with us
HOW THE WEALTH INDUSTRY WORKS WITH US Multiple models, Great Flexibility • Institutions: full access to models and tool, including database feeds. Directly access thru our website • Advisors/RIAs: firm or group-wide access to unlimited research. Direct access via our website or thru partners. • Reta
Slide 45: Research technology platform
RESEARCH TECHNOLOGY PLATFORM Data Collection & Modeling Under One Roof We created our own data collection technology to provide high integrity models to clients. Traditional data feeds are not trustworthy for sophisticated financial modeling. Confidential - New Constructs, LLC 45
Slide 46: Calculations: attention to details
CALCULATIONS: ATTENTION TO DETAILS Free Cash Flow: NOPAT minus Change in Invested Capital How We Compare to traditional approaches to FCF Traditional New Constructs Approach More Approach Quick and Dirty Comprehensive Cash Flow from Ops EBIT - taxes EBIT - taxes NOPAT - Change in Net - Change in Net
Slide 47: Bigger haystacks, more needles
BIGGER HAYSTACKS, MORE NEEDLES Items found only in the MD&A (e.g. gains, charges, deferred items, etc) that distort income statement results are rising rapidly. *This graph was created based on information collected and analyzed by New Constructs, LLC. New Constructs regularly gathers information fr
Slide 48: Asset write-downs are a red flag
ASSET WRITE-DOWNS ARE A RED FLAG 32,583 Over the last 5+ Years, we found 32,583 write-downs. # of Write-Downs 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 2013 2014 Total - 3000+ companes *This graph was created based on information collected and analyzed by New Constructs, LLC. N
Slide 49: Management's influence on profits
MANAGEMENT’S INFLUENCE ON PROFITS Distribution of Return On Plan Asset Assumptions 250 Auditors & investors need to know this data. 200 • Raising the expected Return on Plan Assets (EROPA) reduces reported pension expense. 150 • The mean EROPA for 2014 was 6.5%. Roughly 55% of companies expect a lon
Slide 50: 100% unconflicted
100% UNCONFLICTED New Constructs has no trading, corporate or banking ties – no conflicts. • Morningstar gets paid by fund companies. Fund companies must license ratings from Morningstar to use them in marketing materials. New Constructs = unadulterated expertise in accounting, finance and SEC filin
Slide 51: Disclosures & Disclaimers
DISCLOSURES & DISCLAIMERS New Constructs®, LLC (together with any subsidiaries and/or affiliates, New Constructs®) is an independent organization with no management ties to the companies it covers. None of the members of New Constructs’ management team or the management team of any New Constructs’ a