On Mar 20, we issued an updated research report on Nasdaq OMX Group Inc. NDAQ. The company’s improving leverage and controlled expense guidance supports accelerated capital deployment, boosting investor confidence. However,headwinds related to competition, currency and pricing mar the desired upside.
Nasdaq enjoys a healthy balance sheet and cash position along with modest operating cash flow from its diverse business model. After declining about 2% in 2013 and 11% in 2012, operating cash flow spiked about 20% to $687 million in 2014, primarily driven by higher net income and deferred revenues, also propping up free cash flow by 19.2% to $547 million in 2014.
Additionally, total debt obligations were about 11% lower at 2014-end from 2013-end, with no significant maturities in the near future ($369 million due in 2018 and 31% of total in 2021). Therefore, management outperformed the targeted total debt-to-EBITDA ratio of 2.3x at 2014-end, improving from 2.4x at Jun 2014-end and 3.3x at 2013-end.
These factors have also facilitated the resumption of share repurchases in Jun 2014. From Jan 2010 through Dec 2014, Nasdaq returned about $3 billion through share repurchases.
Nasdaq is focused on growth from acquisitions and organic initiatives that enable entry and cross-selling opportunities into new markets on a low-cost and highly-flexible platform. Notably, the company is seeking to launch Nasdaq Futures Exchange (NFX) by mid-2015 at less-than-half prices as compared with that ofarch-rivals CME Group Inc. CME and Intercontinental Exchange Inc. ICE, who have been enjoying a duopoly so far in the futures market.
NFX energy benchmark futures and options contracts will be cleared by Options Clearing Corp. (OCC), while Nasdaq projects to attain 10% market share within 18–24 months of operation, making it a $50 million business annually. Meanwhile, revenue synergies from fixed-income products of NLX are making a mark with improved volumes in 2014.
On the other hand, Nasdaq witnessed rising expenses in a bid to develop and diversify its business, which pose direct risks to its operating leverage. Notably, the costs related to merger and strategic initiatives, along with compensation and benefits rose substantially in 2014. Even impairment charges of $49 million in 2014 against $14 million in 2013 weighed on the margins and bottom line.
Subsequently, total core operating expenses also increased 7.5% in 2014 and 20.8% in 2013.Although flattish growth in core expenses is projected for 2015, foreign exchange volatility, R&D spending and acquisition-related expenses ($10 million estimated from the DWA acquisition) pose direct threat to the guidance.
Meanwhile, weak volumes and rate per contract have been adversely affecting the top line. Going forward, we do not expect any significant growth unless the current market recovery provides resonance to new listings, trading volumes, liquidity and credit quality.
Earnings Review
This Zacks Rank #3 (Hold) stock kept its earnings streak alive in the trailing four quarters with an average beat of 0.5%. The company’s fourth-quarter 2014 earnings of 81 cents a share also outshone the Zacks Consensus Estimate by 1.3% and the year-ago quarter figure by 8.7%.
Overall, a favorable risk-reward profile in the near term led to upward estimate revisions for 2015 and 2016. The Zacks Consensus Estimate for 2014 and 2015 are now pegged at $3.37 and $3.75 per share, up 4% and 3.3%, respectively, in the last 60 days. On a year-over-year basis, earnings are expected to grow by 17.1% and 11.1% in 2015 and 2016, respectively.
Key Picks in the Sector
Investors interested in the securities exchange industry could consider stocks like MarketAxess Holdings Inc. MKTX, which sports a Zacks Rank #1 (Strong Buy).
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