On Jun 7, we downgraded stock exchange operator -
Nasdaq OMX Group Inc.
) to Underperform based on its faltering financial leverage due
to raised debt and acquisition costs.
Why the Downgrade?
Estimates for Nasdaq have witnessed a steady decline since its
first-quarter 2013 results on Apr 24. The company's first-quarter
earnings per share of 64 cents comfortably surpassed the Zacks
Consensus Estimate and the year-ago quarter's earnings of 61
cents. Meanwhile, total revenue of $418 million missed the Zacks
Consensus Estimate of $426 billion but inched up 1% on a
Following a tempered growth outlook, the Zacks Consensus
Estimate for 2013 has gone down 3.3% to $2.65 per share in the
last 60 days. The Zacks Consensus Estimate for 2014 also slid
2.3% to $3.04 per share. With the Zacks Consensus Estimates for
both 2013 and 2014 going down, the company now has a Zacks Rank
Cause for Concern
Nasdaq's top line is already being marred by weak trading
volumes in both cash equity and derivatives along with poor
clearing and listing revenues. Even non-transaction revenue base
contributes little to the top line. Factors deterring growth
include lower order intakes, decreasing trading activity in the
industry across the U.S. and Europe, muted growth from annual
renewals, unfavorable foreign currency fluctuations and market
Amid an eroding market share, when margins are fraying, a
higher debt burden raises caution, driving ratings agencies to
lower their outlook on Nasdaq's credibility to negative. Although
S&P has removed its CreditWatch in Jun 2013, it continues to
cast a negative outlook on Nasdaq, given the over 40% hike in
debt followed by the acquisitions of Thomson Reuters and
While we believe that the latest acquisitions are expected to
be accretive to Nasdaq's financials, these are also projected to
weigh on expenses and margins in the near term. Nevertheless, the
company's operational and financial limitations reflect the
pressing need to respond to the changing industry dynamics and
dig in prospects for gaining scale.
Other Financial Stocks That Warrant a Look
While Nasdaq shows no clear directional pressure in the near
term, other outperformers of the financial sector including
XL Group Plc
Regional Management Corp.
Investment Technology Group Inc.
) appear impressive. All these stocks carry a Zacks Rank #1
INVEST TECH-NEW (ITG): Free Stock Analysis
NASDAQ OMX GRP (NDAQ): Free Stock Analysis
REGIONAL MANAGE (RM): Free Stock Analysis
XL GROUP PLC (XL): Free Stock Analysis Report
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