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Analyst Blog

We have upgraded our recommendation on NASDAQ OMX Group Inc. (NDAQ - Analyst Report) to Neutral from Underperform based on its recent proactive investments to penetrate deeper into the European over-the-counter (OTC) market, among others, which reflect the company’s long-term growth strategy. However, headwinds related to trading volumes and pricing continue to be the worrying factors.

The company’s first-quarter 2012 operating earnings per share of 61 cents fell shy of the Zacks Consensus Estimate of 63 cents, but were in line with the prior-year quarter’s earnings. NASDAQ’s GAAP net income came in at $85 million or 48 cents per share, lagging net income of$104 million or 57 cents per share recorded in the year-ago quarter.

NASDAQ continues to suffer due to declining and weak trading volumes, which is directly affected by economic and market conditions, stringent regulations, volatility of interest rates, inflation and changes in price levels of securities and the overall level of investor confidence. These limitations reflect the pressing need to respond to the changing industry dynamics and dig in opportunities for gaining competitive strength.

Moreover, severe competition from arch rivals such as NYX Euronext Inc. and CME Group Inc. (CME - Analyst Report) continues to be a lingering concern for NASDAQ. This concern is of particular importance now as the company is aspiring to strengthen its position in derivative and OTC markets, where these rivals are the dominant players.

Conversely, intense competition has also been inspiring the company to explore dynamic growth options into various markets, in an effort to maintain or increase its eroding market share. Accordingly, the latest plan to launch a new interest rate derivative trading platform – NASDAQ NLX – in early 2013 also justifies its strategic move to attain competitive edge in Europe. Moreover, the launch of NASDAQ’s third retail equity stock options trading platform – BX Options – is expected to attract retail investors, thereby boosting trading volumes in the long run.

Meanwhile, the strategic acquisitions such as NOS Clearing, BWise, Glide Technologies, Lithuanian CSD, RapiData, SMART group, ZVM and FTEN enable the company to enter new markets on a low cost and highly flexible platform. Additionally, the company’s high-grade X-stream INET technologies are well-positioned to contribute to growth as the industry is becoming more focused on solutions for effectively managing risk. Overall, we believe that these factors should create additional sales opportunities once the markets rebound.

Hence, based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the second quarter of 2012 at 61 cents per share, which is about 1% lower than the year-ago quarter. For 2012, earnings are expected to climb about 1% over 2011 to $2.56 per share.

Currently, NASDAQ carries a Zacks Rank #4, implying a short-term Sell rating, although long-term recommendation is Neutral.

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