ICE Holds on to Neutral - Analyst Blog
October 21 2011 - 5:45AM
Zacks
We have reiterated our Neutral recommendation on
IntercontinentalExchange Inc. (ICE) based on
strong fundamentals, which are partially offset by the expected
negative impact of regulations and uncertain industry trends.
The company’s second quarter operating earnings of $1.69 per
share were substantially ahead of the Zacks Consensus Estimate of
$1.60 and $1.51 reported in the year-ago period.
IntercontinentalExchange’s competitive strength lies in its
diverse array of products and broad range of risk management
services including trade execution, market data, pre- and
post-trade processing and clearing services on an integrated
platform.
The company has demonstrated immense growth potential in its
futures and OTC markets, thereby gaining a competitive leverage.
Over the past several quarters, the company has launched multiple
new coal, natural gas and gas oil futures contracts, in order to
extensively penetrate the rapidly expanding energy sphere.
IntercontinentalExchange’s organic growth is also significantly
driven by strong growth in contract volumes, average daily
commission and transaction fees, among others. Despite the global
downturn, the company’s markets have shown resilience due to the
consistent client demand for its products and risk management
services.
Further, IntercontinentalExchange has a sturdy balance sheet
with strong cash, receivables and capital position. While treasury cash exceeds
the total debt position, total interest coverage also
remains healthy, reflecting minimal capital expending and solid
operating cash flow growth. These factors also pave the way for
efficient capital deployment, primarily through share
repurchases.
However, 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 inadequate availability of credit. These
adverse conditions have resulted in
credit-freeze, outflows of client funds and investments,
reduced market liquidity losses due to declining asset
values and loan
defaults.
Additionally, IntercontinentalExchange’s operating performance
has been modestly hampered by the financial downturn in 2008 and
the company’s expenses have also been increasing, thereby reducing
the operating and competitive leverage.
Moreover, IntercontinentalExchange is liable to be marred by new
laws that impact its market operations. In July 2010, the U.S.
Commodity Futures Trading Commission (CFTC) determined that certain
contracts traded on IntercontinentalExchange perform significant
price discovery functions and, therefore, must be traded in
compliance with the statutory provisions applicable to significant
price discovery contracts.
With respect to this, in July 2011, the company had to lower its
adjusted net capital requirements from CDS
clearing members, thereby receiving a shot in the arm.
Later, in October 2011, CFTC further proposed that swaps
clearing houses will be required to open access to companies with
at least $50 million in capital to allow more participants and manage
defaults. IntercontinentalExchange could incur additional
costs for infrastructural modifications required for the same.
As a result, the Zacks Consensus Estimate for
IntercontinentalExchange’s third quarter earnings currently stands
at $1.77 per share, up about 25% year-over-year. Of the 16 firms
covering the stock, 14 revised their estimates upward, while no
downward revisions were witnessed in the last 30 days.
For 2011, earnings are expected to be about $6.85 per share, up
21% year-over-year.
IntercontinentalExchange competes with CME Group
Inc. (CME) and NASDAQ OMX Group Inc.
(NDAQ). The company currently caries a Zacks #2 Rank, implying a
short term Buy rating.
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
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