On Apr 15, we reiterated our Neutral recommendation on NYSE Euronext Inc. based on its proposed merger with IntercontinentalExchange Inc. (ICE - Analyst Report) along with disciplined expense management.
Why the Retention?
Estimates for this global stock exchange witnessed minor corrections since the company reported its fourth-quarter 2012 results on Feb 5. NYSE’s fourth-quarter earnings per share and net revenue of 43 cents and $562 million, respectively, topped the Zacks Consensus Estimate. However, results were significantly lower than the year-ago figures.
The deteriorating year-over-year performance was primarily due to the poor transaction and clearing fees that plunged 19.4% as well as market data revenue that declined 5.6%. Together, these constitute about 72% of the gross revenue. While fixed operating expenses dipped 6.0% year over year to $392 million, operating margin tumbled to 30% from 34% recorded in the year-ago quarter.
Moreover, higher debt and capital expenditure deteriorated NYSE’s debt-to-EBITDA ratio to 2.5x at 2012-end from 1.6x at 2011-end. Meanwhile, operating cash flow declined 36.5% year over year to $635 million at 2012-end, underscoring ample financial and operating risks. Nevertheless, management anticipates bringing down debt-to-EBITDA to below 2.0x in 2013.
Additionally, management’s expense guidance for 2013, despite capital investment initiatives, signals a flat trend. While NYSE is on-track to realize 100% of its cost-synergies from Project 14 by 2014, more than $25–$30 million of savings are projected from NYSE Liffe’s shift to ICE Clear beyond Jul 2013. Further, this shift is expected to minimize capital cost projections for the clearing operations.
Alongside, the proposed merger allows both IntercontinentalExchange and NYSE to mutually benefit from the diverse product portfolio, boosting the operating and competitive leverage of the merged entity. With more than 15% of earnings accretion within the first year of the merger startup, management projects run-rate expenses synergies of about $450 million by the second year.
Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 inched up 2 cents to $2.34 per share in the last 60 days. Conversely, the Zacks Consensus Estimate for 2014 remained flat at $2.86 per share in the last 60 days. With the Zacks Consensus Estimates for both 2013 and 2014 exhibiting no clear directional pressure in the near term, NYSE now has a Zacks Rank #3 (Hold).
Other Financial Stocks That Warrant a Look
While NYSE tends to stay in the neutral lane in the near term, other stocks in the financial sector that are outperforming include Moody’s Corp. (MCO - Analyst Report) and Euronet Worldwide Inc. (EEFT - Snapshot Report) . Both the stocks carry a Zacks Rank #1 (Strong Buy).