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On Jul 5, we upgraded our recommendation on Nasdaq OMX Group Inc. (NDAQ - Analyst Report) to Neutral based on its latest acquisitions that create incremental revenue opportunities. However, the sluggish trading volumes environment and intense competition continue to pose risks.

Why the Upgrade?

Estimates for this global stock exchange operator witnessed improvement or remained stable after the company reported its first quarter 2013 results on Apr 24. Nasdaq’s first quarter earnings of 64 cents surpassed the Zacks Consensus Estimate as well as the prior-year quarter earnings of 61 cents. Total revenue of $418 million edged up 1% year over year but lagged the Zacks Consensus Estimate of $426 million, displaying lower revenues from market and listing services.

However, operating expenses were kept in check with only 2.2% growth, while total order value witnessed improvement. Yet, order intakes plunged and operating margin dipped to 43% from 44% in the year-ago quarter. Overall, Nasdaq delivered positive earnings surprises in all of the last 4 quarters with an average beat of 4.96%.

Following the release of the first-quarter results and culmination of significant acquisitions, the Zacks Consensus Estimate for 2013 stood intact at $2.62 per share in the last 60 days. However, the Zacks Consensus Estimate for 2014 grew 3.4% to $3.04 per share in the last 60 days. With the Zacks Consensus Estimates showing no clear directional pressure in 2013 but some growth in 2014, Nasdaq now has a Zacks Rank #3 (Hold).

Although the latest acquisitions of the corporate arm of Thomson Reuters and the benchmark US Treasuries’ eSpeed has raised the debt level of Nasdaq, these are projected to bring in incremental revenues and cost synergies. Management also expects to reduce its debt raised through the latest acquisitions over the next 12 months.

Overall, the intense competition and changing dynamics in the industry justify Nasdaq’s inorganic growth strategy, further shifting its revenue base in the non-transaction space to neutralize the effect of soft volumes environment.

Other Financial Stocks That Warrant a Look

Apart from Nasdaq, other stocks in the stock exchange sector that are outperforming include CME Group Inc. (CME - Analyst Report), CBOE Holdings Inc. (CBOE - Analyst Report) and MarketAxess Holdings Inc. (MKTX - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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