We reiterate our Neutral recommendation on
IntercontinentalExchange Inc.
(
ICE
) to reflect the lack of significant momentum in earnings estimate
revisions. Although the company remains strong due to new
initiatives, acquisition and alliances, yet market volatility has
been adversely affecting trading volumes.
IntercontinentalExchange's first-quarter 2012 operating earnings
of $2.02 per share were in line with the Zacks Consensus Estimate,
but surpassed the year-ago quarter's earnings of $1.74 per share.
Accordingly, net income attributable to shareholders increased
14.7% to $147.9 million when compared with $128.9 million in the
year-ago quarter.
IntercontinentalExchange continues to be cost-effective given
its disciplined expense management. This is reflected by its
controlled mid-single-digit total expense growth in the past couple
of years and is further validated by management's projection of
flat growth in 2012. While the treasury cash and new credit
facilities vigorously exceed the total debt-funding position, total
interest coverage also remains healthy, reflecting minimal capital
expenditure and solid operating cash flow growth, which accelerated
34% year over year in 2011, followed by 19.4% in the first quarter
of 2012. These factors also pave way for efficient capital
deployment.
IntercontinentalExchangehas demonstrated immense growth
potential in its futures and OTC markets, thereby gaining
competitive leverage. The company offers more than 730 cleared OTC
energy contracts, including more than 640 new cleared OTC contracts
since the launch of ICE Clear Europe in November 2008.Additionally,
the U.S. Commodity Futures Trading Commission's (CFTC) provisional
approval on launching ICE Trade Vault as a swap data repository
(SDR) not only opens new long-term growth opportunities but also
conforms to new regulations. Further, IntercontinentalExchange
continues to drive organic growth and even its intermittent
restructuring programs through acquisitions and spin offs have
driven robust inorganic growth, which are reflected in increased
assets and global expansion.
Despite the global downturn, IntercontinentalExchange's markets
have shown resilience due to the consistent client demand for the
company's products and risk management services. 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.
Risks to Operations
However, low interest rates and demand for low-priced products
have been hampering the trading volumes growth of the futures
contracts, as witnessed in the first quarter of 2012. Declining
volumes also pose ample risk on transaction and clearing revenues
that account for majority of the top line. We expect the futures
volumes' growth to remain sluggish until the markets gain
stability.
Over the past few quarters, 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, 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
threateningits 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.
Moreover, amid the current volatile market,
IntercontinentalExchangeis liable to be marred by new laws that
impact market operations such as the Financial Reform Act of 2010
that puts regulatory constraints on block trading and margin
requirements on derivative securities, primarily the OTC swaps
market in the U.S.Conforming to these ruleswould also adversely
hamper the volumes growth and capital position of the company. The
regulations could result in substantial additional costs for
infrastructural modifications and will intensify the competitive
pressure.
Overall, based on the pros and cons, the Zacks Consensus
Estimate pegs earnings for the second quarter of 2012 at $1.92 per
share, which is about 14% higher than the year-ago quarter.
IntercontinentalExchangeis scheduled to release its second quarter
financials before the bell on August 1, 2012.
Currently, IntercontinentalExchangecarries a Zacks Rank #3,
implying a short-term Hold rating, at par with its 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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