On Jan 18, we upgraded our recommendation on
NYSE Euronext Inc.
(
NYX
) to Neutral based on its proposed $8.2 billion merger with
IntercontinentalExchange Inc.
(
ICE
). This shall further boost efficiencies, though higher debt
raises the concerns of the rating agencies. Hence, this stock has
gained a Zacks Rank #3 (Hold), indicating no clear directional
pressure in the near term.
Why the Upgrade?
NYSE reported third-quarter 2012 operating earnings per share of
44 cents, up 3 cents from the Zacks Consensus Estimate. However,
results plunged 38% from 71 cents recorded in the year-ago
quarter. Net revenues stood at $559 million, sliding 20.6% from
$704 million in the prior-year quarter. It also fell short of the
Zacks Consensus Estimate of $570 million. Over the past 4
quarters, NYSE has delivered an average surprise of 1.82%.
Following the release of the third quarter results, the Zacks
Consensus Estimate for 2012 has edged down 1.1% to $1.80 per
share. Moreover, the Zacks Consensus Estimate for 2013 declined
(down 1.8% to $2.26 per share) at a slower pace.
Although NYSE's financial results reflect the industry-wide low
trading scenario, it continues to maintain a leading position by
developing a market model in response to the emerging trends and
technological advancements in the trading environment.
Most significantly, the proposed merger with
IntercontinentalExchange is expected to generate more than 15% of
earnings accretion within the first year of completion, while
boosting the operating and competitive leverage of the merged
entity. Additionally, management projects run-rate expenses
synergies of about $450 million, which will be reaped in the
second year of the merger startup.
Following the merger, IntercontinentalExchange will also
initiate annual dividends of about $300 million, which is the
current dividend payout of NYSE, scheduled to culminate by the
first half of 2013.
However, wariness prevails over the combined debt of the merged
entity, which is projected to be about $4.7 billion, as
IntercontinentalExchange plans to use all of its $1.0 billion
cash and raise another $1.8 billion from its revolving credit
facility to buyout NYSE.
Although the business profile of the merger appears strong and
NYSE is making efforts to reduce its debt obligations through
refinancing and other activities, we believe these actions would
take quite a long time given the company's capital and other
extraordinary cost requirements in the upcoming quarters.
Other Stocks to Consider
Apart from NYSE, other stocks in the stock exchange industry that
are expected to rebound with economic improvement include
CME Group Inc.
(
CME
),
NASDAQ OMX Group Inc.
(
NDAQ
) and IntercontinentalExchange. All these companies carry a Zacks
Rank #3 (Hold).
CME GROUP INC (CME): Free Stock Analysis
Report
INTERCONTINENTL (ICE): Free Stock Analysis
Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis
Report
NYSE EURONEXT (NYX): Free Stock Analysis
Report
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