Neutral on IntercontinentalExchange - Analyst Blog
July 06 2011 - 11:35AM
Zacks
IntercontinentalExchange Inc. (ICE) develops
and offers a diverse array of products and a broad range of risk
management services. Also, the company demonstrated immense growth
potential in its futures and OTC markets, thereby gaining
competitive leverage.
Its
intermittent restructuring programs through acquisitions and
spin-offs have driven robust inorganic growth. The company
possesses a sturdy balance sheet with strong cash, receivables and
capital position.
However, these positives
are somewhat dwarfed by heavy investment for start-up initiatives
and regulatory constraints. Hence we maintain our Neutral
recommendation on the company.
IntercontinentalExchange’s
offering include trade execution, market data, pre- and post-trade
processing and clearing services on an integrated platform.
Additionally, the company’s electronic trading platform benefits
the market participants with price transparency and achievement of
price improvement over alternate means of trade
execution.
Electronic trade execution
also offers time and cost efficiencies by providing firm posted
prices and reducing trade-processing errors and back office
overheads. This enhances new product development and also provides
a competitive advantage to the company.
The company’s inorganic
growth is reflected in increased assets and global expansion.
Enhancing the company’s long term growth strategy across
technology, clearing and operations, the CLE acquisition is
expected to increase IntercontinentalExchange’s capital efficiency,
cross-selling and product development opportunities.
The company’s strong
balance sheet with strong cash, receivables and capital position,
pave the way for efficient capital deployment, primarily through
share repurchases. At the end of the first quarter of 2011, the
company had $210 million worth of stock available for
buyback.
On the flip side, over the
past years, IntercontinentalExchange’s operating performance has
been modestly hampered by the financial downturn in 2008. The
Creditex business performance remains muted. The company’s expenses
are also increasing, thereby reducing the operating and
competitive leverage. Going forward, compensation and benefits
expenses are expected to increase from current levels.
In the current volatile market, IntercontinentalExchange could
be marred by new laws that impact market operations such as the
Financial Reform Act signed in July 2010 that puts regulatory
constraints on derivatives trading, primarily the OTC swaps market
in the U.S.
IntercontinentalExchange’s credit business that required heavy
investment for start-up initiatives has significantly weakened from
the historical highs due to the ongoing sluggish markets that
reduced liquidity. Also, trading participation in certain markets
has become limited based on extraordinary volatility coupled with a
sustained period of uncertainty relating to creditworthiness of the
counter-parties and the inadequate availability of credit to
facilitate trading.
These adverse conditions
have resulted in freezing of credit, outflows of client funds and
investments, reduced market liquidity losses due to declining asset
values and defaults on loans are expected to continue in the near
term.
IntercontinentalExchange
posted first quarter earnings surpassing the Zacks Consensus
Estimate, reflecting modest performance in its core business and
higher volumes that drove operating margins and cash
flow.
The Zacks Consensus
Estimate for second-quarter 2011 is 79 cents per share. For
full years 2011 and 2012, the Zacks Consensus Estimates are
respectively, $3.48 and $2.93 per share.
The quantitative Zacks #3 Rank (short-term Strong Buy rating)
for the company indicates no clear directional pressure on the
stock over the near term.
Based in Atlanta, Georgia, IntercontinentalExchange Inc. owns
and operates an Internet-based global electronic marketplace for
trading in futures and over-the-counter (OTC) commodities and
derivative financial products. It competes with CME Group
Inc. (CME).
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
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