CME CME Group Inc

IntercontinentalExchange Inc.’s (ICE) third quarter operating earnings of $1.87 per share were substantially ahead of the Zacks Consensus Estimate of $1.77 per share and $1.42 per share reported in the year-ago period.

Excluding certain acquisition-related costs, net operating income of $138 million surged 30.3% year over year in the reported quarter. Net income attributable to shareholders was $132.6 million or $1.80 per share, compared with $96.3 million or $1.29 per share in the year-ago quarter.

The quarterly results of ICE benefited from favourable over-the-counter (OTC) execution and record futures trading that in turn led to strong top line growth. The upside was also attributable to flattish operating expenses, growth in the company’s core businesses, significant progress triggered on new initiatives and increasing demand for commodities. However, this was partially offset by higher tax expenses.

ICE’s total revenue increased 18.7% year over year to $340.8 million, also exceeding the Zacks Consensus Estimate of $336 million. The growth was mainly attributable to a 17.7% increase in consolidated transaction and clearing fee revenues to $301.5 million in the reported quarter, primarily driven by strong trading volumes in ICE's crude oil and energy futures and OTC markets, new product introduction along with increase in credit default swap (CDS) clearing revenues.

Additionally, consolidated market data revenues grew 17.1% year over year to $32.2 million while consolidated other revenues increased dramatically to $7.1 million against $3.5 million in the year-ago quarter.

Average daily futures volume increased 23% year over year to 1.6 million contracts, while average daily commissions in ICE's OTC energy business grew 14% year over year to 1.55 million for the quarter, resulting to an 11% year-over-year ascent for the total global OTC segment. Besides, revenue from ICE’s credit default swap (CDS) business totaled $46 million, climbing 8% over the prior-year quarter.

Meanwhile, total operating expenses inched up 0.8% year over year to $136.7 million, primarily due to increase in compensation and benefit expenses coupled with increased depreciation and amortization expenses. Consequently, operating margin climbed to 59.9% from 52.8% in the year-ago period. The effective tax rate was 30% compared with 32% in the prior-year quarter.

Financial Update

At the end of the first nine months of 2011, consolidated cash flow from operations, grew to $541 million, soaring 43% on year-over-year basis. Capital expenditures totaled $19 million in the reported quarter, while $23 million were recorded as capitalized software development costs. Besides, during the reported quarter, operating cash flow spiked 84% year over year to $220 million.

As of September 30, 2011, the company recorded unrestricted cash and investments of $497 million (down from $622 million as of December 31, 2010) while total outstanding debt increased to $602 million from $579 million as of December 31, 2010.

Share Repurchase Update

At the end of the reported quarter, ICE had $82 million of share repurchase capacity still in store according to the share repurchase program that was approved during the fourth quarter of 2009. The company bought back $103 million of common stock during the reported quarter. While $90 million of common stock was repurchased during the fourth quarter, no repurchases were made during the first quarter of 2011. $25 million worth of stock was bought back in the second quarter of 2011.

Guidance for 2H11

In the previous quarter, management had provided an extensive outlook for the second half of 2011. CDS clearing revenues are expected to be between $35 million and $37 million.

Capital expenditures, including capitalized software development costs, were projected in the range of $25–$28 million, driven by continued investments in trading and clearing technology and data centers. CDS clearing revenues are expected to be between $35 million and $37 million in the second half of 2011.

Concurrently, ICE's diluted weighted average outstanding share count for the fourth quarter of 2011 is expected to be in the range of 73.0–74.0 million shares outstanding and for 2011 is expected to be in the range of 73.5–74.5 million shares.

Peer Take

Yesterday, CME Group Inc. (CME) reported its third quarter 2011 earnings per share of $4.74, modestly ahead of the Zacks Consensus Estimate of $4.64 but substantially higher than $3.66 reported in the year-ago quarter. Net income surged 29.4% to $316.1 million from the prior-year earnings of $244.3 million. The uptick was primarily attributable to moderate volume growth and strong expense management.

Growing through product novelty and expansion into the global emerging markets is also crucial for ICE, given the ongoing regulatory turmoil that set limits for speculative market participants and disappointing financial yield for operationally successful CDS clearing initiative.

Overall, we believe that based on the current volatile macro environment, ICE has a strong revenue-generating product portfolio, high earnings visibility, consistent cash generation, disciplined investment and limited balance-sheet risk.

In the long run, these factors are expected to generate strong earnings potential and boost ICE’s competitive leverage in the industry, where presence of arch rivals CME Group and CBOE Holdings Inc. (CBOE) pose a challenging operating environment.

 
CBOE HOLDINGS (CBOE): Free Stock Analysis Report
 
CME GROUP INC (CME): Free Stock Analysis Report
 
INTERCONTINENTL (ICE): Free Stock Analysis Report
 
Zacks Investment Research