Players in the securities and exchanges industry facilitate the buying and selling of stocks, stock options, bonds, and commodity contracts, electronically. Diverse product offerings and an improving economy remain primary catalysts for the securities exchanges industry.
With the focus on developing innovative products, the industry has been successfully meeting the demands of the derivatives industry, while complementing the core product lines. Demand is boosted by investor optimism and companies looking for availability of public capital. Investment in new product extensions and offerings have continued to boost overall growth, thus creating an opportunity for trading volumes to thrive.
Per the global business intelligence leader, IBISWorld, the exchanges have been witnessing a rise in trade volumes over the last five years driving higher transaction and clearing fees, which is a major component of top-line. Per IBISWorld, revenues are estimated to increase through 2023.
Commitment toward building a strategic economic market model through technological advances and upgrade of a wide array of products as well as service offerings has helped the individual exchanges to stay ahead and maintain a competitive streak amid the changing industry dynamics. Additionally, reliance on strategic buyouts has also led to product expansion that has aided the industry players in this industry to retain their market share as well as expand global footprint.
The dependency on product and service portfolio for churning out revenues can be hampered by intense competition as well as market volatility, changes in investment patterns and priorities plus other economic conditions and factors that are beyond control. A reduction in trading volume can impact the market share and pricing of the individual players in the industry. Threats in the form of security breaches, forex volatility and limited accessibility to capital or credit can leave an adverse effect on the overall operational performance.
Industry Outshines on Shareholder Returns
Looking at the past year’s shareholder returns, it appears that consistent improvements in the robust product portfolio have substantially contributed to the top-line growth, thereby helping it retain and boost customer demand. This in turn, has aided in enhancing investor’s confidence in the industry’s growth prospect.
The Zacks Securities and Exchanges Industry, which is a six-stock group within the broader Zacks Finance Sector, has outperformed both the S&P 500 index and its own sector over the past year.
While the stocks in this industry have collectively rallied 18.5%, the Zacks S&P 500 Composite and the Zacks Finance Sector have gained 16.6% and 3%, respectively.
One-Year Price Performance
Securities and Exchanges Stocks Trading Cheap Compared with the Zacks S&P 500 Composite
If we see the valuation right now it looks really cheap and one might get a good sense of the industry’s relative valuation by looking at its price-to-book ratio (P/BV), which is the most appropriate multiple for valuing securities and exchanges because of large variations in their earnings results from one quarter to the next.
This ratio essentially measures a securities and exchange’s current market value relative to what it would be worth if it chooses to shut down.
The industry currently has a trailing 12-month P/BV ratio of 2.85, slightly higher than the lowest level over the past year. When compared with the highest level of 2.94 during that time frame there is still room for upside left. Meanwhile, when compared with 2.76 at the median level over that period, the ratio appears to trend higher.
The space also looks inexpensive when compared with the market at large as the trailing 12-month P/BV ratio for the S&P 500 is 4.10 and the median level stands at 3.85.
Price-to-Book Ratio (TTM)
As finance stocks typically have a lower P/BV ratio, comparing securities and exchanges with the S&P 500 index might not make sense to many investors. But a comparison of the group’s P/BV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/BV ratio as well as the median level of 2.58 for the same period is below the Zacks Securities and Exchanges Industry’s respective ratios.
Price-to-Book Ratio (TTM)
Outperformance May Not Continue Due to Bearish Earnings View
Expectations of increasing customer demand on the back of a varied range of products and service offerings, leading to higher trading volumes should enable securities and exchanges stocks continue generating positive shareholder returns in the near future.
But what really matters to investors is whether this group has potential to perform better than the broader market in the quarters ahead. However, the above ratio analysis shows that the industry is currently overvalued.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences its stock performance.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with last year’s reported number but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry as well as the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019 while the light blue line represents the same for 2018.
Price and Consensus: Zacks Securities and Exchanges Insurance Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $4.67 EPS estimate for the industry in 2018 is not the actual bottom-up dollar EPS estimate for every company within the Zacks Securities and Exchanges industry but rather an illustrative aggregate figure created by our proprietary analytics model. The key factor to keep in mind is not the industry’s earnings of $4.67 per share for 2018 but how this dollar number has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $4.67 EPS estimate for 2018 is down since July-end but up from $4.15 this time last year. In other words, although the sell-side analysts covering the companies in the Zacks Securities and Exchanges industry have been steadily raising their estimates, they started lowering the same over the past three months.
Zacks Industry Rank Indicates Cloudy Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all-member stocks.
The Zacks Securities and Exchanges industry currently carries a Zacks Industry Rank #220, placing it at the bottom 14% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Securities and Exchanges: Earnings & Revenue Trends
Increase in customer demand attributable to constantly evolving product base and higher trading volumes has been driving revenues for the industry. This is indicated by the impressive top-line performances, which have been progressing since the beginning of the current year.
Top-line growth including focus on technological advances and upgrades of a broad range of products and service offerings plus lower tax incidences are boosting the bottom line in turn.
Another important signal of a solid long-term prospect is the rise in the group’s return on equity (ROE), a key metric for evaluating insurance stocks. In this context we see that the metric has been increasing from the beginning of 2014.
A growing product portfolio, which will help generate higher revenues should continue to favor the industry’s performance. Rise in trading volumes, product expansion through prudent acquisitions and lower tax should provide support.
Strategic integrations play a significant role in this industry’ growth as such initiatives have proven to be accretive to its operational performance.
However, market volatility and intense competition as well as changes in investment patterns and priorities pose challenges to the industry. Additionally, cyber breaches, forex volatility and a few factors beyond control can also hurt industry’s growth.
Headquartered in Chicago, IL, CME Group Inc. (CME - Free Report) carries a Zacks Rank #4 (Sell). The Zacks Consensus Estimate for the current year earnings per share is pegged at $6.65 and has been revised 0.4% downward over the past 60 days.
The stock has rallied 27.3% in a year’s time.
Price and Consensus: CME
Headquartered in Atlanta, GA, Intercontinental Exchange, Inc. (ICE - Free Report) has a Zacks Rank of 4 (Sell). The consensus estimate for 2018 bottom line stands at $3.48 and the same has moved 1.7% south over the past 60 days.
The stock has rallied 9.7% in a year.
Price and Consensus: ICE
Stocks to Watch Out For
On the basis of the aforementioned tailwinds, investors can focus on these stocks.
Headquartered in New York, Nasdaq, Inc. (NDAQ - Free Report) holds a Zacks Rank #2 (Buy). The consensus mark for the current year is projected at $4.82 and the same has remained stable over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock has gained nearly 10.6% in a year’s time.
Price and Consensus: NDAQ
Based in New York, MarketAxess Holdings Inc. (MKTX - Free Report) carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the current year is predicted at $4.38 and has been raised 0.2% over the past 60 days.
The stock has gained 2% in a year’s time.
Price and Consensus: MKTX
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