ICE Rock Solid for Long Term - Analyst Blog
March 14 2012 - 1:51PM
Zacks
We have upgraded our recommendation of
IntercontinentalExchange Inc. (ICE) to Outperform
from Neutral based on its high earnings visibility, strong product
portfolio, consistent cash generation, disciplined investment and
limited balance sheet risk, which enables it to be one of the most
dynamic companies in the industry.
The company’s fourth-quarter 2011 operating earnings of $1.76
per share topped the Zacks Consensus Estimate of $1.68 per share
and were also ahead of $1.35 per share reported in the year-ago
period. Results 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 buoyed by lower tax rate, 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-than-expected operating
expenses.
ICE has demonstrated immense growth potential in its futures and
OTC markets, thereby gaining competitive leverage against
arch-rivals such as CME Group Inc. (CME) and
NYSE Euronext Inc. (NYX). The company offers more
than 650 cleared OTC energy contracts, including more than 580 new
cleared OTC contracts since the launch of ICE Clear Europe in
November 2008. The company’s ICE Clear Credit is also a globally
leading clearinghouse for credit default swaps (CDS).
Over the past several quarters, ICE has launched multiple new
coal, natural gas, gas oil and crude oil futures contracts, in
order to extensively penetrate the rapidly expanding energy sphere.
Organic growth is also significantly driven by strong escalation in
contract volumes, average daily commission for ICE's OTC energy
business and transaction fees, reflected by the strong performance
of ICE Brent Crude and ICE Gas Oil futures markets, among
others.
ICE has also driven robust inorganic growth through intermittent
restructuring programs, acquisitions and spin offs. The company’s
initiatives such as the TradeCapture OTC acquisition and expansion
in Brazil through Cetip’s part-acquisition, the BRIX alliance and
the launch of CDS clearing in Latin America also reflect the
company’s aspirations of diversifying into the rapidly growing
emerging markets and products. Besides, the company also plans to
launch Brazilian coffee futures, Brazil Arabica, by 2013.
Going ahead, these unswerving initiatives will continue to drive
both top- and bottom-line growth along with volumes and margin
expansion that will benefit as more futures and OTC contracts are
now exchange-traded and cleared.
Additionally, ICE continues to be cost-effective given its
disciplined expense management, which is reflected by its
controlled mid-single-digit total expense growth in the past couple
of years and further validated by management’s projection of flat
growth in 2012.
Further, ICE poses a sturdy balance sheet with strong cash,
receivables and capital position, reflecting minimal capital
expending and solid operating cash flow growth that accelerated 34%
in 2011. These factors also pave way for efficient capital
deployment, primarily through share repurchases.
On the flip side, ICE’s Creditex business continues to pose a
weak trend based on reduced demand for portfolio hedging, fewer
credit default events and significant regulatory uncertainty.
Moreover, the company has been consistently marred by new
legislations in both the US and Europe related to financial
transaction tax, block trading and margin requirements on OTC
derivatives and other laws related to clearing houses and trade
repositories. Conforming to these rules would also adversely hamper
the volumes growth and capital position of the company.
Although these risks are immensely detrimental to ICE’s growth,
they also reflect the company’s potential to generate higher growth
once the market volatility and regulatory challenges recede. This
enhances our optimism for long term growth.
Hence, the Zacks Consensus Estimate for the first quarter of
2012 is currently pegged at $2.04 per share, up about 15% from the
prior-year quarter, while s for 2012 is projected to increase about
14% over 2011 to $8.07 per share. Three of the 16 analyst firms
revised their estimates upwards in the last 30 days, while no
downward revision was witnessed. ICE carries a Zacks Rank #1, which
translates into a short-term Strong Buy rating, while the long-term
stance is perked at Outperform.
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
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