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Nasdaq Retained at Neutral

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On Dec 5, we reiterated stock exchange operator – Nasdaq OMX Group Inc. (NDAQ - Free Report) at Neutral based on its improved revenue drivers, partially offset by faltering financial leverage due to raised debt and acquisition costs.

Why the Retention?

Estimates for this global stock exchange witnessed minor upward corrections since the company reported its third-quarter 2013 results on Oct 23. Nasdaq’s third-quarter earnings per share of 66 cents and net revenue of $506 million topped the Zacks Consensus Estimate of 62 cents and $502 million, respectively.

The top and bottom line surpassed the year-ago results as well, based on improved revenues across segments. Particularly, the company’s efforts to enhance its technology services are showing positive results. The highs were partially offset by higher-than-expected expense growth, primarily driven by acquisition-related expense. As a result, operating margin dipped to 40% from 44% in the year-ago quarter.

Management aims to reduce debt raised for the recent acquisitions (eSpeed and the corporate arm of Thomson Reuters) over the next 12 months, while also accelerating growth through diversification. While the company reduced its long-term debt during the third-quarter, Nasdaq has shelved its share buyback program until it resumes a total debt-to-EBITDA ratio of about 2.5x by mid-2014, the same currently figuring at 2.9x at the end of Sep 2013.

However, the company is making investments to diversify its business profile to align well with the current market dynamics. Nasdaq’s revenue drivers and improved volumes are expected to generate surplus growth given improving industry trends, althoughincreased competition amplifies operational risk. Core expense growth in 2013 is also likely to approximate that of 2012.

Following the release of the third-quarter results, the Zacks Consensus Estimate for 2013 and 2014 edged up 2.0% each to $2.57 per share and $3.02 a share, respectively, in the last 60 days. With the Zacks Consensus Estimates for both 2013 and 2014 witnessing an upward trend in the near term, Nasdaq now has a Zacks Rank #2 (Buy).

Other Financial Stocks That Warrant a Look

Besides Nasdaq, we also foresee some upward pressure on its peers like CBOE Holdings Inc. (CBOE - Free Report) and IntercontinentalExchange Group Inc. (ICE - Free Report) , both of which carry the same Zacks Rank as Nasdaq. Another stock worth considering in thefinancial sector is Euronet Worldwide Inc. (EEFT - Free Report) which sports a Zacks Rank #1 (Strong Buy).

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