We upgraded our recommendation on
NYSE Euronext Inc.
) to Neutral from Underperform based on the current sustainability
factors. 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.
As a result of higher capital expenditure 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. Conversely, the rating agency believes that the recent
refinancing of an old credit facility of $1.2 billion with a new
$1.0 billion unsecured three-year credit facility is expected to
help the company improve the financial leverage and reduce
borrowing costs, while access to this excess liquidity should also
aid in achieving incremental operational leverage.
Given the weak trading volumes from the global economic
volatility, NYSE is making persistent efforts to enhance operating
efficiencies, which are evident from its long-term goals. Further,
the launch of NYSE Euronext London, in addition to NYPC and
interest rate swap (IRS) derivative contracts on NYSE Liffe, along
with the upcoming repo futures market and clearinghouse in London
in 2013, will likely be beneficial on competitive grounds and
provide ample opportunities to drive the top line in the long term.
In future, NYPC will also have the ability to provide clearing
services for other exchanges and Derivatives Clearing
Moreover, NYSE is ardently working to tap the $8 billion foreign
exchange Contracts for Difference (CFD) retail derivative market by
early 2013, which should attract clients given the tax-efficiency
component retail derivatives and enhance long-term earnings
potential. Even the company's recent acquisitions, primarily in the
information and technology space, bode well for long-term growth.
Hence, despite the global economic volatility, the company
continues to make significant strides in diversifying revenue
streams and creating a world-class diversified multi-asset global
Nevertheless, increased regulatory challenges and continued
volatility of interest rates, foreign currency, inflation, changes
in price levels of securities is expected to limit the trading
activity and the desired upside in the stock at least in the near
term. We do not expect any radical growth in the top line unless
the current market recovery provides resonance to liquidity and
Additionally, NYSE has been facing intense competition from
strong players, such as
CME Group Inc.
), which tends to reduce market share and leverage of its business.
This includes both product and price competition and has continued
to increase as a result of the creation of new execution and
listing venues in both the U.S. and Europe. Increased competition
has been severely hampering growth prospects in trading activities,
reduction in transaction fees and margins, pricing adjustments,
listings and the markets for the company's products; thereby
adversely affecting NYSE's operating results.
Hence, based on the pros and cons, the Zacks Consensus Estimate
pegs NYSE's earnings for the third quarter of 2012 at 50 cents per
share, which is about 30% lower than the year-ago quarter. For
2012, earnings are expected to dip about 18% over 2011 to $2.03 per
share. However, the stock is expected to rebound in 2013.
NYSE currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating and indicates no clear directional 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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