In all the excitement over the pending purchase of New York Euronext (NYX), owners of the New York Stock Exchange, by the Atlanta-based Intercontinental Exchange (ICE), few have really asked whether this makes ICE a good investment.
I think it does.
Codespeed offers a very dry look at the "long" case, saying there are "accretive earnings and synergies." In short, ICE can cut jobs and integrate well with the exchange's present operations.
But let's look a little more deeply. ICE is, after all, currently selling at a premium to the general market, its $123/share price being about 16.5 times last year's earnings.
And the last year hasn't been great. ICE's revenues have been declining each quarter throughout the year, but it should still beat last year's $1.3 billion, and the margins on this business are Apple-like. We're talking about a profit margin of nearly 50% and an operating margin of over 60%. The company's operating cash flow topped $800 million last year and it will easily beat that this year. It has just $800 million in long-term debt matched against nearly $38 billion in assets.
CEO Jeffrey Sprecher gets most of the ink. He was in the electric utility business before acquiring the company's predecessor, the Continental Power Exchange or CPEX, in 1997. CPEX, in fact, created the electronic platform that eventually became ICE. While everyone was talking about Enron a decade ago, the smartest guy in that energy trading room actually turned out to be Jeff Sprecher, who understood that the trading action was more important than a manipulated price.
The COO, Charles Vice, has been with CPEX since before Sprecher bought it, having started his career at EDS before moving into energy management. He's still just 48. The Chief Technology Officer, Edwin Marcial, is just 44 and came from Harris Corp. in 1996. To these you're going to add the best out of Duncan Neiderauer's NYX team - he's becoming President of the combined group.
You are going to have some corporate integration issues, which could hit margins in the near term, but remember why this deal was done. This deal is about Liffe, NYX' global currency derivative business. We're talking about futures on Yen, Euros, Dollars, and the rest, and bond derivatives tied to those currencies. This is a business that can boom if the technology platform is right. ICE's platform is proven.
One more thing. ICE hasn't left the energy business. Far from it. And they're taking a leading role in a derivative of that business, emissions. Don't be surprised if carbon trading starts getting serious discussion in Washington next year, partly as an alternative to other taxes. ICE is ready for it.
I think that's what Codespeed calls "accretive earnings," but I don't think that's the half of it. This is all about technology platforms. If ICE can make its systems compatible with something like the Microsoft (MSFT) Azure cloud, if they can move operations into cloud technology, and if that cloud is dispersed, redundant and resilient as it should be, markets may never close again and your investment in ICE could really take off.