We downgraded our recommendation on
NYSE Euronext Inc.
) to Underperform from Neutral, based on the current sustainability
factor amid weak trading volumes. The company's second-quarter 2012
operating earnings per share of 51 cents were a penny higher than
the Zacks Consensus Estimate of 50 cents, but were much lower than
61 cents recorded in the year-ago quarter.
Resulted reflected a weak top line driven by reduced volumes and
revenues across segments, which was partially offset by decreased
expenses and lower tax rate. Alongside, unfavorable currency
fluctuations and lower average revenue per contract added to the
woes, resulting in deteriorated operating margin.
Over the past few quarters, NYSE has been affected by weak
trading volumes, which is directly based on the economic and market
conditions, volatility of interest rates, inflation, changes in
price levels of securities and the overall level of investors'
confidence. Furthermore, the current initiatives taken up by
regulators and governments, such as restrictions on high frequency
trading and taxes on securities transactions are liable to have a
materially adverse effect on overall trading volumes.
Additionally, NYSE has been facing intense market pressure and
that was evident from its inability to culminate significant
business developments. Recently, the company scrapped its European
launch of a new electronic retail derivatives market, which was
slated to commence in the first quarter of 2013, to tap the
multi-billion Contracts for Difference (CFD) market, thereby
eliminating a strong long-term revenue potential. We do not expect
any radical growth in the top-line unless the current market
recovery provides resonance to liquidity and credit quality.
Moreover, as a result of higher capital expenditure related to
other projects and debt, NYSE's debt-to-EBITDA ratio deteriorated
to 2.1x at the end of June 2012 from 1.6x recorded at the end of
2011. Higher debt and lower working capital in the first half of
2012 also impelled ratings agency S&P to downgrade its outlook
to negative from stable in August 2012.
At such a juncture when heavy capital expending is lined up at
least until mid-2013, consistent dividends and share buybacks
amidst declining operating margins and operating cash flow only
augments business risks.Meanwhile, NYSE has also been facing
intense competition from strong players, such as
CME Group Inc.
), which tends to reduce market share and leverage of its
However, NYSE continues to grow organically as well as through
mergers, acquisitions and alliances. Alongside, the technology will
remain the fastest-growing segment for the combined entity and the
company's enhanced investment into the non-core space of this
segment should also enhance long-term earnings accretion.
NYSE also aims to augment long-term growth strategies by
developing clearinghouse in Europe as well as enhancing technology
and risk-management services, among others. Management projects a
double-digit revenue growth from the information and technology
segment for 2012 along with an increased internationalization of
Concurrently, NYSE continues to drive its operating leverage
through strong expense management, headcount reduction and lower
taxes. Moreover, annual cost savings from new business initiatives
worth $250 million and additional profits from the retail
derivative market by the end of 2014 are also expected to drive
margins in future.
Hence, based on the pros and cons, the Zacks Consensus Estimate
pegs NYSE's earnings for the third quarter of 2012 at 46 cents per
share, which is about 35% lower than the year-ago quarter. For
2012, earnings are expected to dip about 21% over 2011 to $1.95 per
share. However, the stock is expected to rebound in 2013.
NYSE currently retains a Zacks #5 Rank, which translates into a
short-term Strong Sell rating and indicates a strong downward
pressure on the stock in the near term.
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis
NYSE EURONEXT (NYX): Free Stock Analysis Report
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