ICE: Exchanging Data and Analytics
08/15/2017 2:52 am EST
Intercontinental Exchange is a leading network of regulated exchanges and clearing houses for financial and commodity markets.
The company has a multi-asset-class derivatives and cash market franchise, spanning interest rates, equity and equity derivatives, credit, foreign exchange, metals and agricultural commodities.
ICE is benefiting from several secular trends in its core data and listings business, including growth in demand for real-time data and analytics, the increased popularity of passive index investing, and regulations driving the need for price transparency and reporting.
Its trading and clearing business is also seeing greater demand for hedging and trading solutions. While volatility in equity, fixed-income and commodity markets has recently diminished, we believe that a return to greater volatility will increase the need for risk management products.
ICE’s acquisition of Interactive Data Corp. in December 2015 brought together a unique combination of businesses, providing an opportunity for cross-selling as well as for margin improvement through cost synergies.
IDC provides pricing, reference data and trading solutions for banks, mutual funds and asset managers, and helps these customers optimize the use of capital when managing risk.
Following the IDC acquisition, ICE organizes its businesses into two divisions: Data & Listings and Trading & Clearing.
Data & Listings revenues (53% of net 2nd Quarter revenues) include pricing and analytics (21% of net revenue), which rose 16% in constant currency; desktop and connectivity (12% of revenue), which declined 4%; and exchange data (12% of revenue), which grew 2%.
Listing revenues accounted for 9% of net revenues and rose 2% in the 2nd Quarter. We expect this segment to benefit from the leveraging of customer relationships between ICE and IDC, as well as from the growth of passive investing and new regulatory requirements.
Trading and Clearing fees accounted for 47% of 2nd Quarter 2017 net revenues. This group includes Commodities (26% of net revenue) and Financials (17%).
Commodities revenue rose 5% in constant currency in the 2nd Quarter, and should benefit from increased demand for hedging products, as well as from new products.
We believe that margin expansion will enable the shares to trade at a higher valuation. Our revised price target of $72 implies a multiple of 22.7-times our forward four-quarter EPS forecast, at the high end of the historical average range, but merited in our view by the company’s expanding operating margins.
ICE shares are trading at 21.7-times our 2017 EPS estimate, below the multiple of 26.0 for peer CME Group, but toward the high end of their historical average range in the high teens to low 20s. The low-beta (0.59) shares have slightly outperformed the broad market over the past year.
We think that investors should continue to focus on the company’s still strong trading volumes, healthy growth in the pricing/analytics business, and IDC merger synergies. These factors have led to improved operating margins and should remain a catalyst for the shares.
Our price target of $72 (raised from $68) implies a multiple of 22.7-times our forward four-quarter EPS estimate, at the high end of the historical average range.
We believe that this relatively high multiple is warranted given the company’s continued progress on operating margins.