Intercontinental Exchange After the NYSE Deal

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Jan 22, 2015
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In this article, let's take a look at Intercontinental Exchange, Inc. (ICE, Financial), a $23.29 billion market cap company, which is a fully electronic marketplace that offers exchange-based and over-the-counter trading of energy and soft commodity products.

Growth Drivers

When talking about derivatives trading the company is a great player and we expect to continue making profits from this trading. Moreover, two things make it special: one is the electronic energy trading platform and the other the possibility to trade on a regulated exchange and OTC markets in only one platform.

Although it faces a strong competition in the energy market and the New York Mercantile Exchange (NYMEX) is the principal competitor, we think that energy markets will continue to have good volume and so the firm is very well positioned to profit from this.

Acquisitions

Acquisitions are extending the firm's reach. In 2010, it acquired Climate Exchange Plc (CE) and in November 2013, was the turn of the NYSE Euronext. Operating several global exchanges and clearing houses, is in the right way to continue its leadership. A characteristic of the deal is that they will operate with their own brand names and but are expected synergies to appear between them. For example, the management cost savings of about $450 million in a cost control program in a two-year period.

Revenues, Margins and Profitability

Looking at profitability, revenues grew by 198% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.89 vs $1.92). During the past fiscal year, the company reported lower earnings of $4.03 versus $7.52 in the prior year. This year, Wall Street expects an improvement in earnings ($9.56 versus $4.03).

The gross profit margin is considered high, at 57.85% but it has decreased from the same quarter the previous year, and the net profit margin of more than 20% is above that of the industry mean.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
ICE Intercontinental Exchange 4.68
MSCI MSCI Inc 18.58
CME CME Group Inc. 4.72
 Industry Median 7.73

The company has a current ROE of 4.68% which is lower than the one exhibit by the industry median but almost equal to the one of CME Group (CME, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, MSCI Inc. (MSCI, Financial) could be an option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 50.0x, trading at a premium compared to an average of 25.2x for the industry. To use another metric, its price-to-book ratio of 1.9x indicates a premium versus the industry average of 1.77x while the price-to-sales ratio of 5.9x is above the industry average of 3.65x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

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Growth of 10,000

If you had invested $10,000 five years ago, today you could have $20,329, which represents a 15.3% compound annual growth rate (CAGR).

Final Comment

As outlined in the article, this Atlanta-based company will be able to continue achieving profits, deriving significant value from its strategic moves and I think it will post solid returns in the future.

Hedge fund gurus like Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) added this stock to their portfolios in their quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned