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NASDAQ OMX Group – Over the Counter appears Undervalued

October 22, 2009 | About:
NDAQ: Oct. 22, 2009 - $19.85 /share


52-week range: $14.96 (Nov. 21, 2008) - $33.94 (Nov. 5, 2008)













Nasdaq OMX is an equity and derivatives exchange with operations in the United States, plus the Nordic and Baltic regions of Europe. The company derives the majority of its revenues from transaction execution, market data, listing fees, and market technology. They also have complementary business lines such as investor relations and executive insurance. The recent acquisition of the Philadelphia Exchange greatly expanded their market share in the options arena.


NDAQ experienced huge growth from the time of its IPO in July 2002 right through 2008. This year is likely to show a modest drop in EPS before an expected return to record or near record earnings in 2010.


The rebound in US and world markets since the March lows has seen much improved trading volumes and new listings compared with the depressed levels from 2008.


Here are their per share numbers from continuing operations as reported by Value Line:






























































Year


Sales


C/F


EPS


B/V


Avg. P/E


52-wk. Range


2004


6.84


0.88


d.0.14


0.33


NMF


5.50 – 12.60


2005


10.58


1.51


0.57


1.90


36.1x


7.60 – 45.20


2006


14.76


1.51


0.75


12.98


45.9x


23.90 – 46.80


2007


17.55


1.95


1.59


15.90


22.1x


26.60 – 50.50


2008


18.07


2.48


2.01


21.01


16.4x


15.00 – 49.90


2009*


18.50


2.28


1.83


22.75


12.1x


17.50 – 33.94


* 2009 data includes Zacks estimates for the second half.


Much of the book value surge since 2005 came from secondary offerings to pay for acquisitions. Shares outstanding went from 83.15 MM at year-end 2005 to about 203 MM currently.


Zacks sees 2009 – 2010 EPS of $1.83 and $2.03 respectively making the multiple less than 10.9x this year’s and $< 9.8x next year’s estimates. Just a peek at the chart above will confirm that today’s P/E is pretty much the lowest valuation ever for these shares.


Morningstar and Standard & Poors each rate NDAQ as 4-stars (out of 5). Morningstar sees a ‘fair value’ of $28 while S&P is a bit more conservative with a $26.60 ‘fair value’ estimate.


NDAQ shares are among the laggards since the March market low, making them look attractive relative to stocks that have already made big moves.


Value Line thinks a normalized P/E would be 17x. Even 15 times year-ahead projections would bring NDAQ shares back up to $30.45 or 53% above today’s quote.


Is that a reasonable target price? I think so. NDAQ actually changed hands above $45 at peaks in each calendar year 2005-2006-2007-and 2008 and the shares have touched $27.40 already in 2009.


The record earnings expected in 2010 should easily support a move to at least the $25 - $30 area.


Here’s a very nice buy/write combination that allows for excellent 15-month returns without taking on any undue risk.




























Cash Outlay


Cash Inflow


Buy 1000 NDAQ @ $19.85 /share


$19,850




Sell 10 Jan. 2011 $25 calls @ $1.95 /sh.




$1,950


Sell 10 Jan. 2011 $25 puts @ $6.70 /sh.




$6,700


Net Cash Out-of-Pocket


$11,200






If NDAQ shares rise to at least $25 (+ 26%) by Jan. 21, 2011:



· The $25 calls will be exercised.

· You will sell your shares for $25,000.

· The $25 puts will expire worthless.

· You will end up with no shares and $25,000 cash.

· You will have no further option obligations.


That best-case scenario would be a $13,800 profit on an $11,200 net cash outlay for a cash-on-cash return of 123% achieved in just 15 months on shares that only needed to rise by 26% from trade inception.




What’s the downside?


If NDAQ shares remain below $25 on the Jan. 21, 2011 expiration date:


· The $25 calls will expire worthless.


· The $25 puts will be exercised.

· You will be forced to buy another 1000 NDAQ shares.

· You will need to lay out an additional $25,000 in cash.

· You will have no further option obligations.

· You will end up with 2000 NDAQ shares.


What’s your break-even point on the whole trade?


On the original 1000 shares it’s their $19.85 purchase price less

the $1.95 /share call premium = $17.90 /share.





On the ‘put’ shares it’s the $25 strike price less the

$6.70 /share put premium = $18.30 /share.


Your overall break-even would be $18.10 /share or $1.75 /share (-8.8%)

below the starting price.


Summary:


Nasdaq OMX is a solid market-leading company that seems quite cheap based on all previous history. Buying and writing at the $25 strike price for January 2010 would lever a 26% or better move up into a more than 123% cash-on-cash return.


If NDAQ shares do not rise as expected, you are protected against loss on any drop of less than 8.8%.




Disclosure: Author is long NDAQ shares and short NDAQ options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.7/5 (6 votes)

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