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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

ICE: Cooled Off, Making it Much Hotter

May 10, 2014 | About:

Valuation Matters. Don't be scared to buy low.

Intercontinental Exchange (NYSE:ICE) is already undervalued. Selling put options on ICE can give traders an even larger margin of safety.

Companies create wealth over time by growing their assets and earnings. Some of them pay dividends which typically rise along with improving fundamentals. Shares in these growth firms are pretty sure to go up in value over the long term.

Intercontinental Exchange (NYSE:ICE) came public on November 21, 2005 at a price of $26. Its shares closed on May 9, 2014 at $188.23. That was good for a gain of 624% plus dividends in the 8.5 years since its IPO.

ICE’s results from 2006, its first full year as a public company, explain the good price action. The stock, which rose by 143.8%, has actually gone up a bit less than most of its other measurable business metrics.

Over the years the vagaries of the stock market have priced ICE everywhere from cheap to dear. Traders who initiated positions in 2007 at an absurdly high P/E ratio (57.5x) are still underwater today, almost 6.5 years later.

ICE has posted stellar results since then, but P/E compression kept shareholders singing the blues. That was also the case for buyers in mid-2009 at more than 28x earnings. It took over three years for the fundamentals to catch up to the share price. They are finally showing decent profits despite paying too high a price initially.

Buying at below normal P/Es gives the opposite effect. There is nothing sweeter than the wonderful effect of an expanding multiple on rising EPS. Buyers near the lowest valuation points during the past few years have seen great total returns.

Intercontinental Exchange has always been a good company. It has sometimes been a good stock. Investors don’t get many chance to buy at prices like 2008’s nadir. Throw that sub-12 P/E out as an outlier that is unlikely to present itself again.

ICE’s 2010 and 2011 exact low valuations came at 17.3x and 14.9x the earnings in those years. The current quote of $188.23 represents a similar 17.2x this year’s estimate of $10.94 and just 14.0x the consensus view of $13.42 for 2015.

A 65-cent quarterly dividend was initiated in Q4 2013. That translates to a well-covered 1.38% current yield. In our crazy ZIRP world, that yield is better than what can presently be earned with a $50k minimum deposit in a 3-year bank CD.

If you exclude non-recurring items, ICE has never posted a negative year-over-year comparison as a public company. Value Line expects EPS to reach $21.00 within the next 3 – 5 years. Their long term target price range runs from $335 - $505 based on achieving that level of profitability and a regression to a normalized 20 multiple.

Those extrapolations do not appear crazy at all, based on ICE’s past history. The post-recession P/E has averaged 19.6x. Three of the past five years saw ICE’s average annual multiple above 20. Trailing 12-month EPS through March 31, 2014, are now slightly more than double what ICE achieved in calendar 2008.

Standard & Poors sees ICE’s ‘fair value’ as greater than $250. That is well above today’s price and one of the largest under valuations in S&P’s entire research universe.

My very conservative one-year goal price is about $208. That assumes a 19 multiple, while leaving room for a positive surprise. ICE reached $227 during 2013 and peaked at $229.50 earlier this year.

Independent research outfit, Trefis, calculates sum-of-the-parts valuation estimates using proprietary tools. They see Intercontinental Exchange as being worth $241 per share.

Anyone not convinced that ICE has already bottomed might wish to sell Dec. 2014, $170 or $175 strike price puts. Late Friday afternoon they were selling for $6.90 and $8.50 per share respectively.

The worst case scenario for these put sellers becomes being forced to buy 100 shares per contract at net prices of either $166.50 or $163.10. ICE has not been available that reasonably since early in June of 2013. That proved to be a very fleeting window of opportunity.

Maximum profit, should ICE remain above the selected strike price(s) as expected, would be keeping 100% of all premiums received without needing to purchase any shares.

Buy near a 52-week low or get paid not to buy. Either result looms quite appealing.

Disclosure: Presently short ICE Dec. 2014, $170 & $175 puts. I may purchase ICE shares at any time.

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Dr. Paul Price


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