ICE's Improved Leverage & Growth Prospects Raise Optimism
On Oct 10, we issued an updated research report on Intercontinental Exchange Inc. (ICE). An improved financial leverage and achievement of over 40% in cost synergies have scored well with both ratings agencies and investors. However, absence of comparable growth parameters, post NYSE acquisition, along with other operating risks presently fail to provide a clear growth business trend.
Additionally, this Zacks Rank #3 (Hold) stock has kept the earnings streak alive in the trailing four quarters with an average beat of 4.0%. The company’s second-quarter 2014 earnings of $2.10 a share outshone the Zacks Consensus Estimate by 4% but declined from the year-ago quarter figure by 4.1%.
Total revenue spiked about 114% in first-half 2014, driven by the NYSE acquisition. Management also projects run-rate expense synergies of about $550 million (up from $500 million), about 44% of which has already been achieved so far in 2014, while more than 90% will likely be earned by 2015-end. The cost synergies are also expected to expand margins to about 60% by 2016-end from the current 45–50% band.
ICE also improved its financial leverage to its targeted 1.5x at Jun 2014-end,from the peak of over 3.0x.Moreover, incremental cash flow boosts efficiencies and pave the way for strategic acquisitions and divestments, product novelty and global expansion. ICE’s proactive efforts to successfully integrate NYSE over the medium term are also impressive. Resumption of share buybacks further support high earnings visibility.
Challenges to Tackle
ICE has been facing stiff competition from the arch-rivals, like CBOE Holdings Inc. (CBOE), Nasdaq OMX Group Inc. (NDAQ) and CME Group Inc. (CME), who are rapidly evolving in order to gain market share and stay ahead in the race. This has also relatively slowed down the growth momentum of ICE. The vast outlay of growth plans by dominant players through acquisitions, setting up of clearing houses, along with new product and service initiations amid regulatory challenges indicate the swiftly changing dynamics in the exchange industry.
Even operationally, reduced demand for portfolio hedging, currency fluctuations, weak rate per contract and significant regulatory uncertainty are hampering growth in trading volumes. Apart from this, higher expenses due to rise in operating and capital costs are only nibbling into ICE’s margins. The expense curve is likely to move upward in the coming quarters as well, also validated by management’s raised operating and capital expense guidance in 2014.
Overall, significant risks in the near term have led to minor downward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate dipped 1.5% and 1.4% to $8.90 and $11.08 per share, respectively, in the last 60 days.
Moreover, the Most Accurate Estimate for ICE’s 2014 and 2015 earnings currently stand at $8.86 and $11.00 a share, resulting in an Earnings ESP of +0.3% and -0.1%, respectively. However, on a year-over-year basis, earnings per share is expected to escalate by about 8.1% in 2014 and 24.7% in 2015.
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