NYSE Euronext: Finding Gains Thanks to Worldwide Reach and a High Yield

 |  Includes: DIA, NYX, QQQ, SPY
by: Paul Price
The New York Stock Exchange is arguably the best known investment listing venue in the world. Its merger with Euronext further advanced this status as the largest financial instrument listing firm. The total market value of corporations listed with NYX equal about $30 trillion – a higher value than the market caps of all companies listed on the next four largest exchanges combined. NYX operates six cash equities exchanges and six derivatives exchanges located in five countries around the world.
NYSE Euronext (NYSE:NYX) has been aggressively growing its exposure to the equity options markets in both the US and Europe. It earns money via trading activity, from initial and recurring (annual) listing fees paid by its associated companies and from the sale of its data streams.
NYX shares came public in March of 2006 when the markets were hot. The shares peaked at $112 late that year on final 2006 EPS of $1.59 – an insane P/E of 70x. Estimates for 2009 (with Q4 yet to be reported) now run between $1.85 and $2.01 making today’s multiple a much more reasonable 13x.
Consensus views for 2010 center on $2.25 /share putting the forward multiple at <11.6x.
Dividends were initiated in 2007 and have been raised since to their present rate of $0.30 quarterly. That’s good for a very nice 4.61% current yield – better income than what’s now available on bank CDs and even 10-year treasuries. With low capital spending needs and total interest coverage of about 6.9x, the payout looks to be sustainable.
Here are the per share numbers from continuing operations for NYX as reported by Value Line:
Avg. P/E
52-wk Range
48.60 – 112.00
64.30 – 109.50
16.30 – 87.70
14.52 – 31.93
Click to enlarge
* 2009 data includes Q4 consensus estimates.
While the NYSE is no longer totally dominant in its space, it remains a major player. Expense reduction and firming equities markets bode well for improved results in both revenues and earnings this year and further into the future. The best growth may well come from their increasing exposure to the worldwide derivatives markets.
At less than 12x year-ahead expectations I don’t see a lot of risk from today’s price point. The 4.6% yield certainly will provide a floor. Why sell these shares to put money into lower yielding instruments?
I’m not counting on NYX getting back to its historical P/E levels of > 20x. I do think we’ll see a rebound to at least 14x forward earnings over the next year or two. Even that minor rebound would take NYX shares back to about $31.50 by year-end (or + 21% from yesterday’s close).
Is that a reasonable assumption? Standard and Poors now carries a 12-month target price of $30 and Morningstar sees ‘fair value’ as $35 while assigning NYX a four-star rating (with five-stars as their maximum). Value Line is using a 16x multiple in figuring their 3-5 year goal range. At sixteen times VL’s 2010 estimate these shares would reach $35 this year.
A straight share purchased should offer 20% - 30% total returns over the next year or so. In fact, NYX shares traded as high as $31.93 and up during each of the years 2006 – 2009.
As a option oriented investor I see even better prospects with NYX as a buy/write candidate.
Here’s a nice 24-month play that offers great returns with less risk than the outright holders of the shares are assuming…
Cash Outlay
Cash Inflow
Buy 1000 NYX @ $26 /sh.
Sell 10 Jan. 2012 $30 calls @ $2.50 /sh.
Sell 10 Jan. 2012 $30 puts @ $8.00 /sh.
Net Cash Out-of-Pocket
Click to enlarge
If NYX shares rise by $4 or more (+15.4%) by the Jan. 2012 expiration date:
· The $30 calls will be exercised.
· You will sell your shares for $30,000.
· The $30 puts will expire worthless.
· You will likely have collected $2,400 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $32,400 in cash.
This best-case scenario would result in a net profit of $16,900 on the original $15,500 cash outlay. That’s a 109% total return over the 2-year time horizon (assuming you write the puts against paid-up, marginable equity held in a margin –type account).
What’s the risk?
If NYX shares fail to exceed $30 by the Jan. 2012 expiration date:
· The $30 calls will expire worthless.
· The $30 puts will be exercised.
· You will be forced to buy an additional 1000 NYS shares.
· You will need to lay out another $30,000 in cash.
· You will likely collect $2,400 in dividends.
· You will have no further option obligations.
· You will end up with 2000 NYX shares and $2,400.
What’s the break-even point on the whole trade?
On the original 1000 shares it’s their $26 purchase price less the $2.50 /share call premium = $23.50 /share.
On the ‘put’ shares it’s the $30 strike price less the $8 /share put premium = $22 /share.
Your overall break-even would be $22.75 (excluding dividends) and $21.55 /share (including the dividends).
NYX could fall by as much as $4.55 /share or (-17.1%) without causing a loss on this trade.
NYX Euronext appears undervalued and it offers a substantial yield.
A 16% or greater move up by January 2012 will translate to a 109% total return for our somewhat conservative buy/write combination play.
There is a built-in 17% margin of safety just in case things don’t play out as expected.
Disclosure: Long NYS shares, short NYX options