We have downgraded our recommendation on
IntercontinentalExchange Inc.
(
ICE
) to Neutral, based on its slow growth momentum during the first
quarter coupled with intensely emerging competitive pressure.
However, fundamentally the stock continues to remain a long-run
player.
The company's fourth-quarter 2011 operating earnings of $1.76
per share topped both the Zacks Consensus Estimate of $1.68 per
share and $1.35 per share reported in the year-ago period.
Excluding certain net acquisition-related costs, net operating
income of $129.3 million surged 29.4% year over year in the
reported quarter. IntercontinentalExchange's total revenue
escalated 14.8% year over year to $327.2 million and came almost in
line with the Zacks Consensus Estimate.
The quarterly results of IntercontinentalExchange 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 by new initiatives and
increasing demand for commodities. However, this was partially
offset by higher-than-expected operating expenses.
IntercontinentalExchangehas demonstrated immense growth
potential in its futures and OTC markets, thereby gaining operating
leverage. The company offers more than 700 cleared OTC energy
contracts, including more than 608 new cleared OTC contracts since
the launch of ICE Clear Europe in November 2008. Besides, the
clearing of foreign exchange OTC contracts, scheduled to start in
the second quarter of 2012, should further refine
IntercontinentalExchange's business model and aid in complying with
regulatory standards.
Moreover, IntercontinentalExchange not only continues to drive
organic growth, its intermittent restructuring programs through
acquisitions and spin offs have driven robust inorganic growth,
which are reflected in increased assets and global expansion. Going
ahead, management also seeks for more strategic acquisition
opportunities in order to gain scale and counter the changing
industry dynamics.
Further, the company poses a sturdy balance sheet with strong
cash, receivables and capital position. Its treasury cash and new
credit facilities vigorously exceeds the total debt-funding
position, which is also reflected by the company's operating cash
flow that accelerated 34% in 2011. These factors also pave way for
efficient capital deployment, primarily through share repurchases
along with business development.
However, on the flip side, IntercontinentalExchange's Creditex
business performance remains muted, declining 21.1% year over year
in 2010 and 5.4% in 2011, on a sluggish volume trend based on
reduced demand for portfolio hedging, fewer credit default events
and significant regulatory uncertainty. Besides, the company's
operating leverage faces risks from higher capital expenditure and
other expenses, which are necessary to stay competitive. Management
has already guided a total of $90-100 million of capital and other
costs for 2012, which could likely trend upward given new product
launches in the upcoming quarters. Going forward, compensation and
benefits expenses are expected to increase from current levels,
primarily due to additional employees, variable performance bonuses
and non-cash compensation expenses.
Over the past few months, IntercontinentalExchangehas been
facing a challenging global operating environment as most of the
arch-rivals are rapidly evolving through new and innovative product
and service launches in order to gain market share and stay ahead
in the competition. This has also relatively slowed down the growth
momentum of IntercontinentalExchange. The recent outlay of growth
plans by dominant players such as
NYSE Euronext Inc.
(
NYX
) and
CME Group Inc.
(
CME
) through acquisitions and the setting up of clearinghouses along
with new product and service initiations in the derivatives market
have already pointed out the swiftly changing dynamics of the
exchange industry.
Such aggressive industry efforts are not only keeping the
company's management on its toes but are also directly threatening
its operating and competitive leverage. In future, the company may
even have to resort to price reductions and margin contractions
amid intense competition. Hence, we believe that management should
make productive endeavours as well as manage cash and liquidity
position proactively, in order to retain and grow its industry
position.
Nevertheless, a high earnings visibility, strong product
portfolio, consistent cash generation, disciplined investment and
limited balance-sheet risk enable IntercontinentalExchange to be
one of the most dynamic companies in the industry. However, a
limited upside compared with its peers in the near term validates
our Neutral recommendation for now.
Based on the pros and cons, the Zacks Consensus Estimate for the
first quarter of 2012 is currently pegged at $2.02 per share,
escalating about 14% over the prior-year period. In the last 30
days, the stock witnessed downward estimate revisions from 9 of the
16 analysts, while only a couple of analysts raised estimates.
IntercontinentalExchange carries a Zacks Rank #3, implying a
short-term Hold rating and a long-term Neutral recommendation.
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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