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NYSE's Profit Margins in Equities Could Pick Up Post Deutsche Boerse Merger
3/1/2011 2:30:00 PM
NYSE Euronext ( NYX ), which competes with Nasdaq ( NDAQ ) and Chicago Mercantile Exchange ( CME ), is the world's leading stock exchange in cash trading both in terms of volume and value. NYSE provides the trading platform and services for trade execution of stocks listed on its exchanges - NYSE, NYSE Arca, NYSE Amex - as well as for orders that are routed to other market centers for execution. It charges transaction fees for executing these trades.
Due to the global economic downturn, NYSE Euronext's EBITDA margin from its cash equity trades in its U.S. exchanges tumbled from around 38% in 2006 to -4.2% in 2009. The margin has recovered a bit in 2010, and we expect it to increase slightly in the short-term and stabilize thereafter owing to fierce pricing competition among stock exchanges to gain more volumes. NYSE Euronext could however benefit from economies of scale from its merger with Deutsche Boerse AG, which can push its margin higher.
We currently have a Trefis price estimate of $34.77 for NYSE Euronext's stock , below the current market price of $37.
Competition among Stock Exchanges
NYSE Euronext mainly competes with Nasdaq in the cash equities market. Although the number of listings on NYSE is double that of Nasdaq's, NYSE has been losing market share over the years to its closest competitor mainly due to slower implementation of newer trading techniques. In addition to Nasdaq, there are smaller exchanges like Bats Global Markets, Chicago Stock Exchange and the Pacific Stock Exchange that are lowering transaction fee to attract more volumes and liquidity. Our base case forecast expects that fierce competition will keep NYSE's margin suppressed.
Deutsche Boerse Merger Could Lift NYSE's Cash Trading Margin
However, NYSE Euronext and Deutsche Boerse AG anticipate that the business merger could generate 300 million Euros ($450 million) in cost savings principally from economies of scale in information technology, clearing operations, market operations and corporate center functions. We believe these cost savings could push NYSE's margins ahead of our current expectations as we highlighted in a recent note entitled NYSE Euronext and Deutsche Boerse Merger Spells Promising Margin Outlook . If higher margins were able to push ahead to around 20%, we estimate that this could add around 10% upside to our current price estimate for NYSE's business.
Trefis Member Forecast
Trefis members forecast that NYSE Euronext's U.S. cash equity trading EBITDA margin will decrease from 14.5% in 2011 to 12% by the end of the Trefis forecast period similar to the baseline Trefis estimate of an increase from 11% to 13% during the same period. This implies a slight downside in our price estimate of 1-2% which is already around 7% below the current market price.
See the complete analysis for NYSE Euronext .