On Mar 10, we issued an updated research report on Intercontinental Exchange Inc. ICE. The company’s solid fourth-quarter results along with a strong cash flow and achievement of targeted debt reduction, sale of non-core assets and cost synergies remain impressive. However, risks from integration, increasing capital expenses and regulatory challenges remain an overhangon the stock.
This Zacks Rank #2 (Buy) stock has kept the earnings streak alive in the trailing four quarters with an average beat of 3.1%. The company’s fourth-quarter 2014 earnings of $2.59 a share topped the Zacks Consensus Estimate by 2% and the year-ago quarter figure by about 30%.
An escalated top line across segments was the primary growth driver. Margins improved despite higher expenses and lower trading volumes.
Meanwhile, a balanced risk-reward profile in the near term has led to minor estimate revisions for 2015, wherein the Zacks Consensus Estimate rose by 3 pennies to $12.31 per share in the last 30 days. However, the same remained intact at $14.35 a share for 2016. On a year-over-year basis, earnings are expected to escalate 27.8% and 16.7% in 2015 and 2016, respectively.
Sound Growth Strategy
As projected, ICE earned about 50% of its run-rate expense synergies of about $550 million (up from $500 million) by 2014-end, while about 73% in likely to garnered by 2015-end, 82% by first-quarter 2016 and 100% by first-quarter 2017. The completion indicates expense reduction by 30%.
The cost synergies are also expected to expand margins to about 60% by 2016-end from the current 45–55% band. This was further validated by management’s tightened operating and capital expense guidance in 2015.
Moreover, the company topped the industry in listings business, by being a leader in IPOs and raising over $59 billion of capital in 2013 and about $70 billion in 2014, along with a continually strong pipeline in 2015, thereby boosting its listing and technology revenues. Going ahead, improved synergies from Liffe, ICE Benchmark Administration (IBA), SuperDerivatives and NYSE are also expected to drive data services revenues in 2015.
On the capital front too, an improved financial leverage of 1.7x and 105% growth in operating cash flow facilitated $1.0 billion worth of shareholder returns via share repurchases and dividends in 2014, despite acquisition outlays.
Thorns on the Path
The regulatory uncertainties that ICE has been facing across the U.S. and Europe are likely to pose financial pressure in the future through higher capital requirements, fee reduction and margin contraction, particularly, in transaction-based operations that accounted for about 61% of the company’s total net revenue in 2014. The persistent decline in derivative volumes is also expected to continue in 2015 until markets gain stability.
Meanwhile, the legal hassles in Asia have delayed the launch of ICE Future Singapore and ICE Clear Singapore to Jun 2015 now from the prior deadline of March. The inability to achieve cost synergies timely and integrate the recently acquired assets also raises substantial risks. Hence, we remain on the periphery to analyze future developments within ICE’s business.
Key Sector Picks
Investors interested in the securities exchange sector could also consider Markit Ltd. MRKT and CME Group Inc. CME, both bearing the same Zacks Rank as ICE. Another promising peer, MarketAxess Holdings Inc. MKTX, sporting a Zacks Rank #1 (Strong Buy) is also worth considering.
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