Interactive Brokers Group, Inc. Valuation

Why Use the Excess-Return approach?

This company operates in the financial-services sector, so traditional free-cash-flow DCFs break down:

• Invisible reinvestment. Net capital spending and working-capital swings are hard to pin down because most “investment” is buried in operating expenses and balance-sheet flows.
• Debt is raw material. Deposits and repos behave like inventory, so defining leverage and a cost of capital is murky.
• Regulatory constraints. Capital-ratio rules and product limits dictate growth and leverage, making long-range cash-flow forecasts speculative.
• Reliable anchor. Book equity is regulator-verified and often marked to market; value therefore hinges on the single spread ROE − cost of equity, which the Simple and Two-Stage Excess-Return models convert directly into intrinsic value.

Why we don’t export these models to other sectors

• Observable cash flows. Manufacturers, retailers and tech firms can measure cap-ex, working capital and debt, so cash-flow-based DCFs remain more informative.
• Book equity mismatch. Their book values reflect historical cost and depreciation, diverging sharply from economic capital; anchoring value to book equity would therefore mislead.

Reference: https://pages.stern.nyu.edu/~adamodar/pdfiles/papers/finfirm09.pdf

Why Use Dividend Discount Models?

This company pays out dividends, so valuing the share as the present value of future dividends can give some insight into the stock's intrinsic value.

Simple Dividend Discount Model

Use when the firm is already mature and dividends grow at a steady, sustainable rate.

Value ≈ next-year dividend ÷ (cost of equity − perpetual growth).

Two-Stage Dividend Discount Model

Use when the firm still has a finite high-growth window before settling into steady payouts.

1. Discount each dividend expected during the high-growth years.
2. Add the discounted value of a perpetuity that starts once growth stabilizes.