Neutral on NASDAQ - Analyst Blog
June 22 2011 - 8:00AM
Zacks
We maintain our Neutral recommendation on NASDAQ OMX
Group Inc. (NDAQ) based on its current sustainability
factor. The company’s first quarter earnings beat the Zacks
Consensus Estimate driven by strong revenue growth across the board
coupled with moderate expense management. However, new listings and
order intakes continued to be on the downside.
NASDAQ has been facing intense competition with the recent wave
of M&A activities in the stock exchange industry that tends to
reduce the market share and the leverage of its business. This
includes both product and price competition and has continued to
increase as a result of the creation of new execution and listing
venues in the U.S. and Europe.
While exchange operators across the globe are expanding their
operating efficiencies through significant M&A, NASDAQ is
desperately seeking a business combination in order to diversify
beyond product and geography. The recent failure of
NYSE
Euronext Inc.’s (NYX) takeover bid further
threatens NASDAQ’s size and global footprint.
NASDAQ’s
top-line growth has been marred by a decline in order intakes and
market data exchange revenues that remain sluggish due to lower
average net fee per share, decreasing trading activity and market
competition. Besides, most of NASDAQ’s derivative revenue comes
from stock options, as opposed to the more-lucrative futures
business, contributing only 19% to net revenues.
The company’s OTC derivatives clearing in the US,
International Derivatives Clearing Group (IDCG), has failed to
generate any growth impetus in interest rate swaps due to very few
members and intense competition from NYSE and CME Group
Inc. (CME).
Alongside, the company’s debt burden has also driven the rating
agencies, Moody’s and S&P’s, to lower their outlook on NASDAQ
from stable to negative in April 2011. Going ahead, increased
competition can severely hamper growth in trading activities,
pricing adjustments, listings and the markets for the company s
products, thereby adversely affecting the operating results.
On the flip side, NASDAQ continues to drive its operating
leverage through a strong expense management, headcount reduction,
lower taxes and fewer charges. Additionally, successful integration
efforts associated with NASDAQ's business combination with OMX and
the Philadelphia Stock Exchange acquisition also drove expense
reductions.
This is also reflected in the company’s conservative expense
outlook for 2011 although some additional expenses are projected on
account of the recent SMART group and FTEN acquisitions.
Furthermore,
NASDAQ’s options business continues to reflect strong performance
despite the weakness experienced in equity trading in recent years.
The company’s organic growth is helped by the increase in
market technology and access services revenues primarily due to the
increased deliveries of contracts, increased demand for co-location
services and changes in the exchange rates of various currencies as
compared to the US dollar.
Additionally, the company’s net derivatives trading and clearing
exchange platform continue to perform on a strong base. Going
forward, these revenue drivers have the potential to generate
growth and accomplish management’s target of $2 billion of
annualized revenue by 2013.
NASDAQ’s
outstanding technical performance coupled with the latest SMART
Group and FTEN acquisitions has enabled the company to enter new
markets at a low cost and on a highly flexible platform,
offering value addition to its clients and creating additional
sales opportunities. Besides, NASDAQ enjoys strong capital leverage
that provides scope for stock repurchase and acquisitions.
On account of these factors, the Zacks Consensus Estimate for
the second quarter of 2011 is pegged at 61 cents, surging about 17%
year over year. Meanwhile, no analysts have made any upward
revisions in the stock over the last 30 days, although 3 out of 17
analysts have lowered their estimates for the upcoming quarter. This
further reflects the operating and competitive risks attached to
the stock.
Overall,
NASDAQ’s diversified business mix, cost, revenue and technology
synergies will enable it to benefit from improving economic
conditions in future. Furthermore, an improved outlook for equity
investments and the number of recession-proven private companies
seeking capital is expected to add to the IPO pipeline in 2011.
However, increased competition, product pricing and government
regulations continue to be headwinds for the company's market share
and liquidity.
On Tuesday, the shares of NASDAQ closed at $24.28,
reflecting a
1.9% increase.
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