Anxious over the sustainability factor, recently we downgraded
our recommendation on
NYSE Euronext Inc.
) to Underperform from Neutral.
The company's first-quarter 2012 operating earnings per share of
47 cents fell shy of the Zacks Consensus Estimate of 49 cents and
were substantially lower than 68 cents recorded in the year-ago
quarter. Consequently, operating net income plunged 31.6% year over
year to $121 million from $177 million in the year-ago quarter.
Results primarily reflected weak volumes and pricing across
board, which also led lower top line and operating margins.
Moreover, the increased market volatility has been sagging NYSE's
competitive position. However, lower expenses partially offset the
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. Particularly, derivative volumes in the Europe and cash
trading volumes in the U.S. sapped over the last few quarters and
this is expected to continue given the ongoing debt-crisis in
Europe and economic volatility in the U.S.
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. Also, the proposed MiFID
II and EMIR legislations in Europe to make markets more competitive
and negate systematic risks, the final adoption of which is
expected by late 2012 or early 2013 will likely have a negative
Moreover, NYSE's top-line growth has been marred by consistent
decline in transaction and clearing services and market data
revenues along with lower-than-expected listing revenues that
plummeted on lower listing fees and rate per contract, foreign
currency fluctuations, lower margins, decreasing trading activity
in derivative and cash trading and market competition.
Equity trading across the globe poses weakness primarily due to
deteriorating credit quality that further impacts liquidity and
matched share volume adversely. Economic volatility, in
combination with intense competition, has also led to a decline in
the size of securities offerings, new listings, trading volumes and
related revenues. We do not expect any radical growth on the top
line unless the current market recovery provides resonance to
liquidity and credit quality.
Additionally, NYSE has been facing intense market pressure and
that was evident from its inability to culminate significant
business developments. Recently, NYSE was also shoved off the bid
to acquire London Metals Exchange. More significantly, the
year-long hustle to culminate the company's merger with
Frankfurt-based Deutsche Boerse was declared unsuccessful in
February 2012. Adversely, the failed deal added to several
expenses, thereby weighing on the margins.
NYSE has a bigger debt burden than its prime peer
CME Group Inc.
). Presently, higher debt and capital expenditure have raised the
financial leverage to 26.06%, whereas NYSE's debt-to-EBITDA ratio
deteriorated to 2.0x at the end of the first quarter of 2012 from
1.6x at 2011-end, which again underscores ample financial and
operating risks. A risky financial and operating leverage could
also shake the investors' confidence, and call for an appropriate
check and control system right away.
However, NYSE continues to grow organically as well as through
mergers, acquisitions and alliances. While the recent acquisitions
and alliance are expected to boost fundamentals, 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.
Management projects a double-digit revenue growth from the
information and technology segment for 2012 along with an increased
internationalization of client base. Going ahead, an improvement in
the admission and annual fees to the exchange should also provide
strong support to the top line.
Besides, NYSE continues to drive its operating leverage through
strong expense management, headcount reduction and lower taxes.
Consequently, the company's total operating expenses declined about
37% year over year in 2009 followed by a 19% dip in 2010.
Although expenses rose marginally by 3% in 2011, it does not
indicate a long-term trend as management's expense guidance for
2012, despite the capital investment initiatives, signals a
downward trend. 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.
NYSE also aims to augment long-term growth strategies by
developing clearinghouse in Europe, enhancing technology and
risk-management services and launching retail derivative market,
among others. Hence, considering all the pros and cons, the Zacks
Consensus Estimate pegs earnings for the second quarter of 2012 at
52 cents, which is way below 61 cents recorded in the year-ago
quarter. Of the 14 firms covering the stock, 5 revised their
estimates downward in the last 30 days, while a couple of upward
revisions were witnessed.
Currently, NYSE carries a Zacks Rank #3, implying a short-term
Neutral rating, although the long-term recommendation is
CME GROUP INC (CME): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
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