On Sep 16, we issued an updated research report on Nasdaq OMX Group Inc. (NDAQ). Its consistent debt reduction and growth from acquisitions and organic initiatives raise optimism. However, higher expenses and macro-economic factors such as intense competition, currency fluctuations, regulatory challenges and a possible rise in Fed rates create uncertainly over the stock’s near-term prospects.
This Zacks Rank #3 (Hold) stock kept its earnings streak alive with positive earnings surprises in the trailing four quarters an an average beat of 3.8%. The company’s second-quarter 2014 earnings of 70 cents a share was also higher than the Zacks Consensus Estimate by 2.9% and the year-ago quarter figure by 12.9%.
Nasdaq’s performance primarily benefited from 9% organic growth in Nasdaq’s non-trading business segments (technology, listing and information revenues), which accounted for 74% of total net revenue and marked a 19% rise from the prior-year quarter. These were partially offset by about 15% rise in core operating expenses, although operating margin improved slightly to 41.1% from 40.8% in the year-ago quarter.
Balanced Risk-Reward Profile
Nasdaq’s total debt obligations were about 7% lower at Jun 2014-end from 2013-end, therefore achieving management’s targeted total debt-to-EBITDA of 2.5x at Jun 2014-end, improving from 3.3x at 2013-end. Improved debt profile and cash flows propel prospects for incremental business investments and shareholders return going forward.
On the other hand, both Thomson Reuters and eSpeed acquisitions werefinancially accretive in the first year, adding to Nasdaq’s growing fixed-income product portfolio. These acquisitions along with that of Bwise, boost cost and revenue synergies in the intermediate term as well.
Management also aims to hit 20% in Technology Solutions margins by 2015-end from the current 7% in first half of 2014. A strong pipeline of accounts and products from eSpeed and Thomson Reuters in 2014, respectively, along with potential cross-selling opportunities are further projected to drive growth in this portfolio.
Additionally, thenumber of initial public offerings (IPOs) in Nasdaq rose 52% in 2013 and 66% in the first-half of 2014, indicating an improved outlook for 2014. However, the severe technical outages experienced by Nasdaq during the IPO of Facebook Inc. (FB) in 2012 have not only raised doubts about the company’s technical competence and reputation but have also shaken the overall market confidence, significantly eroding the company’s competiveness. This is also evident from AlibabaGroup Holding Ltd.’s IPO preference for NYSE over Nasdaq.
Moreover, heightened competition, decline in revenues per contract and trading activity in the industry, muted growth in annual renewals and regulatory upheavals continue to affect Nasdaq’s derivative trading and clearing revenues in both the U.S. and Europe. The rate hikes by the Fed expected from next year onwards may further affect client demand since it may tend to make the stock market a slightly less attractive place for investments.
Overall, a balanced risk-reward profile in the near term led to minor upward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 and 2015 is now pegged at $2.90 and $3.29 per share, up 3 cents and 2 cents a share, respectively, in the last 60 days.
Key Picks in the Sector
While we remain at the periphery with regard to Nasdaq at present, investors interested in the financial sector could consider stocks like Vantiv Inc. (VNTV) and Green Dot Corporation (GDOT). Both these sport a Zacks Rank #1 (Strong Buy).
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