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Intercontinental Exchange Sees Segment Growth, Cost Woes Stay

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Intercontinental Exchange, Inc. (ICE - Free Report) is well-poised to gain from higher industry volumes, transaction and clearing volume, strong retention rate as well as increase in products pricing.

The stock has seen its estimates for 2020 and 2021 move up nearly 0.2% and 0.6%, respectively in the past 30 days, reflecting investor optimism.

The company has a decent earnings surprise history. The company beat estimates in each of the last four quarters with the average surprise being 4.63%. Its adjusted earnings per share have grown at a 11-year (2006-2019) CAGR of 17%.

Factors Driving Performance

The securities and exchange company continues to witness strong performance of its two segments, Trading and Clearing Segment and Data and Listings Segment. The Trading and Clearing Segment, which accounted for nearly 67% of the company’s total revenues in the first half of 2020, has consistently performed well.

This segment should benefit from higher fees from derivatives, fixed income, cash equities and equity options trading, derivatives clearing and mortgage technology services, increase in volumes traded, product introductions, increased equity market volatility, higher other financial futures and options revenues, and higher industry volumes, transaction and clearing volume.

The company’s Data and Listings segment put up an impressive performance as well. Its revenue growth in the second quarter of 2020 marked the 42nd consecutive quarter of year-over-year data services revenue growth. Strong retention rate of existing customers, addition of new customers, increased purchases by existing customers, increase in products pricing, growth in connectivity services including the ICE Global Network, along with stronger desktop revenues are expected to drive the performance of this segment.

Based on such solid segmental results, Intercontinental Exchange’s top line witnessed growth a five-year CAGR (2014-2019) of 11%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $5.6 billion and $5.8 billion, respectively, indicating year-over-year increase of nearly 8.5% and 2.7%.

As part of its strategic initiatives, the company remains focused on acquisitions to strengthen competitive position globally, broaden product offerings and services as well as to support the growth of the company. In the first quarter of 2020, it acquired Bridge2 Solutions in a bid to launch products that further drive loyalty and empower consumers to trade, transfer and spend digital assets in entirely new ways.

Recently, the company purchased mortgage-software firm Ellie Mae for $11 billion in a stock-cash transaction. The acquisition of Ellie Mae is expected to increase adjusted earnings per share in the first full year of ownership and realize run-rate cost synergies of $50 million to $65 million by the end of the third quarter. Acquisitions have also helped it achieve expense synergies.

Furthermore, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 14.2% betters the industry average of 12.3%.

Moreover, shares of this Zacks Rank #3 (Hold) company have outperformed the industry in a year’s time. The stock has gained 9% against the industry’s decline of 0.9%.



However, the company has been witnessing rising expenses due to higher compensation and benefits, acquisition-related transaction and integration cost. Such costs tend to weigh on the company’s margins. Notably, in the second quarter, net margin contracted 140 basis points year over year. Adjusted operating expenses are expected to be in the range of $2.320 billion to $2.370 billion in 2020.

Nonetheless, the Zacks Consensus Estimate for 2020 and 2021 earnings per share is pegged at $4.40 and $4.58, indicating year-over-year increase of nearly 13.4% and 4.1%, respectively. The expected long-term earnings growth is pegged at 8.5%, which betters the industry average of 6.6%.

Stocks to Consider

Some better-ranked stocks from the finance sector include Moody's Corporation (MCO - Free Report) , OTC Markets Group Inc. (OTCM - Free Report) and MoneyGram International Inc. (MGI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moody's surpassed estimates in each of the last four quarters, with the average beat being 13.81%.

OTC Markets surpassed estimates in three of the last four quarters, with the average earnings beat being 10.54%.

MoneyGram surpassed estimates in two of the last four quarters, with the average earnings surprise being 14.77%.

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