NYSE Continues to Underperform

We have reiterated our recommendation on the derivative exchange player – NYSE Euronext Inc. ( NYX - Analyst Report ) at Underperform given its consistent deterioration in trading volumes and the proposed merger with IntercontinentalExchange Inc. ( ICE - Analyst Report ) .

The Downward Trend

Estimates for NYSE have been declining ever since the company declared its third quarter results on November 6. NYSE reported third-quarter 2012 operating earnings per share of 44 cents, up 3 cents from the Zacks Consensus Estimate of 41 cents. However, it was significantly lower than 71 cents recorded in the year-ago quarter.

Over the last 60 days, the Zacks Consensus Estimate for 2012 has gone down 27.2% year over year to $1.81 per share, with 13 of 14 analyst firms revising their estimates downward. This also validates NYSE’s current Zacks #4 Rank (Sell), indicating a slight downward pressure on the stock in the near-term.

However, results are expected to improve in 2013 as the Zacks Consensus Estimate is expected to increase 27.4% over 2012 to $2.30 per share. Nevertheless, 12 out of the 14 analyst firms have revised their estimates downward over the last 60 days, indicating uncertainty in growth prospects.

Cause for Wariness

Over the past few quarters, NYSE has been affected by weak trading volumes, based on the volatility of the macro-economic factors such as unfavourable changes in interest rates, inflation and currency along with intense competition. These factors shake the overall investors’ confidence.

Furthermore, the current initiatives taken up by regulators and governments globally are liable to have a materially adverse effect on overall trading volumes.Management has raised it capital cost projections for the clearing operations in Europe in order to deal with the tough regulations in the continent. Moreover, NYSE bears the brunt of higher debt and borrowing costs, which further shrunk the margins in the first nine months of 2012.

On top of this, the proposed merger with IntercontinentalExchange, announced last month, has made ratings agencies worry about the huge combined debt of the merged entity amid low working capital. Although the business profile of the merger appears strong and is expected to generate strong cost synergies and competitive leverage, it also raises questions over the future of NYSE.

Exchange Stocks That Warrant a Look

While we wait to analyze further developments in NYSE, other dominant players of the exchange industry such as IntercontinentalExchange and CME Group Inc. (CME), both carrying Zacks #3 Rank (Hold), are worth a look.