Shares of the biggest U.S.-based stock, futures and options exchanges have lost nearly three-quarters of their value this year as investors get ready for an anticipated slump once the current volatility wears off and bear market indifference to securities trading becomes the norm. There's probably truth in that outlook, but Barron's says the selloff in exchange shares is overdone by any measure.
"The market has priced in a far more pessimistic outlook than I think is realistic," Benn Steil of the Council on Foreign Relations says. All four U.S. exchanges - NYSE Euronext (NYX), Nasdaq OMX (NDAQ), CME Group (CME) and IntercontinentalExchange (ICE) - trade at forward P/E multiples that are shadows of what they commanded last year, and fetch just a fraction of their book value.
Even if we slash another 20% off the NYSE's 2009 profits, bringing it back to a modest low-teens multiple (it now commands just 6.4x) would leave the shares roughly 60% higher.
Goldman's Daniel Harris thinks stock trading volume could fall 13% in 2009, with futures down 5% and options 4%. Meanwhile shares seem to anticipate a much more drastic 20-25% drop in volume.
Strangely, despite the exchanges' steady cash flow and lack of exposure to toxic debt, shares have suffered even more than bank stocks, and trade at multiples that seem puny when compared to much more vulnerable credit-card companies like Visa (V) and MasterCard (MA).
Not to mention the boost exchange stocks could see as regulators push for previously unlisted securities - like OTC stocks and credit-default swaps - to become regulated. Other bullish factors include the move away from the floor (electronic volume has consistently outswelled manual thanks to the ease with which positions can be opened and closed) and globalization - which could bolster volume if cross-border trading becomes more accessible.
Of the four, Barron's likes the stock exchanges (NYX, NDAQ) better because a high percentage of their revenue doesn't even come from trade volume, but rather listings and data dissemination which are "annuity-like businesses." NYSE has been punished more than Nasdaq, due to concerns over costs associated with its trading floor and worries over emerging European platforms, which makes it most poised to bounce.
Barron's cover story is uncannily prescient. This weekend, Der Spiegel published a story quoting four people with direct knowledge of the situation that Deutsche Boerse, Europe’s biggest exchange, is studying a merger offer for NYSE Euronext (NYX). Expect plenty of action in exchange stocks Monday.