2023-12-03 21:03:21 ET
Summary
- Intercontinental Exchange buy rating from September reaffirmed.
- Positives include earnings and revenue growth, dividend growth, and improving equity.
- Some headwinds to my bullish rating are the share price spike above the moving average and a below-average dividend yield compared to peers.
- The risk profile is low, and the mortgage tech business is actually growing.
Company Snapshot
Today's research note covers Intercontinental Exchange ( ICE ) , in the financial exchanges sector.
Some relevant facts about this company include the fact that it is the parent company of the New York Stock Exchange, but also fixed-income and data solutions to help clients reduce risk as well as mortgage technology solutions. For instance, one of their solutions called Encompass is designed as a solution to help the industry reduce costs and expand profit margins.
Since my last note on this stock in September , where it appears I accurately called it a buy , it has gone up over 5% :
ICE - performance since last rating (Seeking Alpha)
This time around, I will apply a slightly updated rating methodology and also use the most recent earnings results that came out in early November.
Total Rating Score
Based on the score total in today's note, I'm rating this stock a buy.
Comparing my rating to the consensus on Seeking Alpha today, my rating is aligned with the consensus from SA analysts and Wall Street.
ICE - rating consensus (Seeking Alpha)
Rating Methodology
My simplified and straightforward 8-point approach focuses on a few core areas such as revenue and earnings growth, dividend income opportunity, undervaluation opportunity, a share price presenting a value-buying potential, and identifying a key risk of the company as well as its potential impact to an investor.
Top-Line Revenue YoY Growth
I am looking for any positive revenue growth on a YoY basis, and here is what I found:
In the quarter ending September, total revenue went up to $2B from $1.81B in the same quarter a year prior, for a 10% YoY growth.
As an exchange operator, that business segment depends on trading volume to drive transaction fees. Along those lines, we can see that transaction revenue went up on a YoY basis:
ICE - revenue breakdown (company q3 presentation)
One area of potential growth is their mortgage tech business, as the firm tries to penetrate the $14B total addressable market, while currently covering only about $2.1B of market share:
ICE - mortgage tech potential (company q3 results)
The other positive call out to mention is this firm's revenue diversification, which I think lowers revenue risk.
Supporting that thesis is what CFO Gardiner said in the Q3 earnings release :
We once again generated revenue and earnings per share growth, driven by a continuation of robust trading results across our commodity complex and compounding growth in our recurring revenues. Our strong results are a testament to the power of our diverse business model .
Net Income YoY Growth
I am looking for any positive net income growth on a YoY basis, and here is what I found:
The most recent quarter saw a net income of $541MM vs a net loss of ($191)MM a year ago which at first appears like there was a few hundred percent YoY improvement to earnings, so I also investigated further data points.
What seems to have driven the FY2022 Q3 net loss was a one-time charge related to fintech subsidiary Bakkt. According to the company's FY2022 Q3 earnings release, "third quarter GAAP diluted loss per share was $0.34, primarily due to net losses from Bakkt."
Because of that, I wanted to compare this last quarter with Dec 2022 instead. Comparing this last quarter with Dec 2022 it was a 27% growth, which is more realistic.
One item that can impact the bottom-line is operating expenses on the income statement, and the company is expecting a slight rise in those in Q4, from the roughly $1B in operating expenses in Q3,
ICE's fourth quarter 2023 GAAP operating expenses are expected to be in a range of $1.21 billion to $1.22 billion. Adjusted operating expenses are expected to be in a range of $955 million to $965 million.
The other expense trend I am watching is the rising trend in their interest expenses, which went from $176MM in Sept 2022 to $206MM in Sept 2023, a 17% increase.
For now though, earnings estimates are calling for Q4 results to see a YoY earnings growth, and considering this firm beat 3 out of the last 4 estimates, it may be poised to do so again not so much due to falling costs but more due to strong revenue growth.
Dividend 10-Year Growth
I am looking for dividend 10-year growth trends, and here is what I found:
When comparing the annual dividend from 2013 which was just $0.13, to the one in 2022 which was $1.52, that is a $1.39/share growth over 10 years.
I expect this dividend strength to continue, as the company is well capitalized with $2.4B in adjusted free cash flow so far and $713MM in capital returned to shareholders already this year.
ICE - capital return (company q3 results)
Dividend Yield Above Average
I am looking for a dividend yield above its sector average, and here is what I found:
When comparing the dividend yield to three peers I selected who are financial exchange operators, my stock comes out on the low end in terms of yield. Chicago's CME Group ( CME ) leads the way with over 4% yield, and other peers include Frankfurt's Deutsche Borse ( OTCPK:DBOEY ) and the UK's London Stock Exchange Group ( OTCPK:LDNXF ).
I would not pick this one for its yield, therefore, with better options available in this sector, but would rather snag a better yield if its share price dips again.
P/E Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-earnings , and here is what I found:
As of this article, using valuation data on Seeking Alpha, I found that the forward P/E ratio of 25.66 is 164% above the sector average.
What I think is driving this valuation is the spike in the share price, which for the better part of the year has been trading above the moving average. However, the 27% earnings growth vs Dec 2022, which I already mentioned, tells me this valuation is justified and not overvalued. Had it been a jump in the share price and a YoY decline in earnings, I would have said overvalued, but in this case, no.
P/B Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-book value , and here is what I found:
The forward P/B ratio of 2.52 is 138% above the sector average.
What I think is behind this multiple is not a drop in equity/book value but rather a spike in share price. In fact, if you look at the balance sheet the total equity went up to $25.5B in September from $22.4B a year prior, a nearly 14% increase in book value .
At the same time, the current share price has spiked but is above the 200-day simple moving average by just under 4%. If you look at the chart in the next section I presented, you will see that the current price is still down from its high this summer.
So, I consider this price multiple justified, and not overvalued.
Share Price vs 200-day Average
My portfolio strategy prefers dip-buying opportunities when the share price falls below the 200-day simple moving average , so here is what I found:
As of this article writing, the share price was trading 3.6% above the 200-day simple moving average I am tracking. As you can see in the chart, the stock has been bullish for much of the year, trading above the 200-day average, then finally taking a dip this fall to rebound again.
Since I just missed that price dip this fall, I personally will take a pass on this share price right now and would wait for the next dip, which also will push up my dividend yield. This share price seems more like hold territory than buy or sell potential, particularly for someone who bought into the fall dip.
Key Risk
As an investor and analyst I find it relevant to analyze risk as well, and here is one key risk of this company I identified:
Besides operating financial exchanges, and various data solutions for clients, this firm does quite a bit of business with mortgage technology, which begs the question of exposure risk to the mortgage industry and all that entails. In fact, it was a risk I mentioned in my prior rating of this stock.
However, the data from Q3 results show that the mortgage tech segment actually grew YoY total revenue by 20%.
Now, let's also look at more positive news, and that is coming from the mortgage industry itself.
According to a November 29th article by the Mortgage Bankers Association ,
Mortgage rates decreased for the fourth time in five weeks, with the 30-year fixed rate dipping to 7.37 percent, the lowest level in 10 weeks. There was a slight increase in applications overall, driven by a five percent increase in purchase applications.
So, the evidence shows rates stabilizing and mortgage demand ticking up, hence I think the risk of negative exposure to this industry for this company is low.
Wrap-Up
To summarize, after a holistic scoring approach, I am maintaining my September buy rating on this stock for now, reiterated by growth in earnings and revenue, low-risk exposure, and dividend growth.
A few offsetting factors were the below-average dividend yield and the above-average share price, which are related because if the share price takes a dip it could push up the dividend yield.
I continue to keep the exchanges on my watchlist, so along with CME Group, this one being the NYSE parent company remains one I am keeping an eye on, and from the evidence I presented, I remain modestly positive about it.
For further details see:
Intercontinental Exchange: Buy Rating Reaffirmed As Earnings Impress While Risk Remains Low