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Analyst Blog

On Jun 28, 2014, Zacks Investment Research downgraded IntercontinentalExchange Group Inc. , or ICE Group, by two notches to a Zacks Rank #5 (Strong Sell) from Zacks Rank #3 (Hold).

Why the Downgrade?

ICE Group has been witnessing downward estimate revisions since the company’s first-quarter 2014 results and a sluggish growth outlook, despite the ongoing business restructuring initiatives. Additionally, this global exchange operator underperformed the one-year S&P 500 index, which recorded growth of 11.2% against a negative return of 4.6% clocked by the company.

On May 8, ICE Group reported first-quarter 2014 operating earnings per share (EPS) of $2.60, which was in line withthe Zacks Consensus Estimate but higher than the prior-year quarter figure by 28.1%.

While the top line grew a whopping 165%, total expenses spiked 244%, both on a year-over-year basis. As a result, operating margin deteriorated to 43.9% from 56.8% in the year-ago quarter. Moreover, average daily volumes of total futures and options fell 18% till May 2014 this year, reflecting weakness in average rate per contract as well. The absence of share buybacks throughout 2013 and the first quarter of 2014 also limited EPS growth.

Sluggish Growth

Though ICE Group has been actively consolidating its business post the NYSE acquisition, it faces major headwinds in the form ofintense competition, weak market dynamics and higher financial leverage. Poor volumes coupled with higher operating expenses, tax rate and capital expenditure, projected in the upcoming quarters, further signal added risk to margins. These factors also making investors jittery about desirable growth in the near-term.

Meanwhile, the Zacks Consensus Estimate for 2014 and 2015 declined 12.5% and 9.8% to $9.67 and $12.13 a share, respectively, in the last 60 days. No upward estimate revision was witnessed for both these years.

Moreover, the Most Accurate estimate for ICE Group’s 2014 and 2015 earnings currently stand at $9.23 and $11.65 a share, resulting in an Earnings ESP of -4.6% and -4.0%, respectively, which depict a slow growth momentum.

Other Worthy Financial Stocks

While we prefer to avoid ICE Group for the time being, better-ranked financial stocks like Fidelity National Information Services Inc. , VeriFone Systems Inc. and Total System Services Inc. are worth considering. All these stocks sporta Zacks Rank #1 (Strong Buy).

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