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On Oct 3, we reiterated our recommendation on IntercontinentalExchange Inc. (ICE - Analyst Report) at Neutral based on its business expansion initiatives that drives operating leverage. However, impact of regulations and volatile industry trends raise caution.

Why the Retention?

Estimates for IntercontinentalExchange have remained steady since the company reported its second-quarter 2013 results on Aug 6. The company’s earnings per share of $2.19 and revenues of $371.6 million breezed past the Zacks Consensus Estimate by 0.9% and 0.4%, respectively.

Moreover, both the top and bottom line surpassed the year-ago results by 5.8% and 12.3%, respectively, based on improved volumes from futures contracts and higher revenue from the credit default swaps (CDS) business. However, higher-than-expected expenses weighed on the margins, although cash flow increased.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 edged down 4.1% to $8.19 per share in the last 60 days. Additionally, the Zacks Consensus Estimate for 2014 inched down 0.8% to $9.52 a share. With the Zacks Consensus Estimate for both 2013 and 2014 showing slight downward pressure on the stock in the near term, the company now has a Zacks Rank #4 (Sell).

Moreover, the Most Accurate Estimate for IntercontinentalExchange’s 2013 earnings stands at $8.11 a share, resulting in an Earnings ESP of -0.98%.

Intense global competition coupled with increased regulatory compliances and currency fluctuations deter the desired upside in the stock. However, despite these challenges, IntercontinentalExchange’s growth is sustained by its consistent inorganic growth, diversified business mix, strong capital position, meaningful exposure in emerging markets and impressive operating leverage.   

Although the raised debt for NYSE Euronext Inc. acquisition is likely to deteriorate the financial leverage substantially in the near term,management expects to improve it to below 1.5x soon enough. However, the ratings agencies are wary of the integration and execution of the merged entity, which promises to have a vast scale of operations.

Other Financial Stocks That Warrant a Look

While we prefer to remain on the sidelines regarding IntercontinentalExchange, other outperforming stocks in the financial sector include Official Payments Holdings Inc. , and Total System Services Inc. (TSS - Analyst Report). Both these stocks carry a Zacks Rank #1 (Strong Buy).

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