2024-03-18 07:00:00 ET
Summary
- Intercontinental Exchange is a top-tier performer with a business model that has key characteristics of a good compounder, including durability and high cash flow generation.
- ICE generates roughly half of its revenue through its exchanges, which include the New York Stock Exchange.
- The company has a strong balance sheet, high recurring revenue, and a history of consistent dividend hikes, making it an attractive long-term investment option.
Leo Nelissen helped me research and write this article.
In 2016, Morgan Stanley published a fascinating article on the power of buying equity “compounders.”
According to the article, a company can be a good compounder when it has a few key characteristics:
- Durability: This means the company needs to have a sustainable competitive advantage. This can be many things, including superior products, a business model that is hard to copy, or other advantages.
- High cash flow generation: It’s best if this is achieved through a combination of recurring revenue, high margins, and low capital intensity. Usually, I look for a free cash flow conversion rate, meaning what percentage of net income ends up as free cash flow?
- Low capital intensity: This means the company does not need a lot of investment in physical assets to function. While elevated capital intensity is not always a bad thing (think of Class I railroads), it does help if a company is not dependent on elevated CapEx to maintain and grow its business.
- Low financial leverage: This means the company has a healthy balance sheet. This allows it to return cash to shareholders and protect itself against uncertain economic conditions.
- Superior returns on invested capital (“ROIC”): Companies that achieve high returns on their investments tend to perform better. This is also a sign of good management.
Read the full article on Seeking Alpha
For further details see:
Intercontinental Exchange: This 'Bell Ringer' Wants To Own This Bellwether