NYSE Group Posts Impressive Earnings - But Where's the Long-Term Value?

NYSE Group Inc (NYX) announced impressive increases in Q4 net income swinging from losses to profits. They reviewed a flurry of mergers, alliances, investments and technological innovations. All of which are designed to capture more and more trading transactions and the associated revenue stream.

Some of the spends are huge as increasingly difficult efficiencies are wrung out of the system. In the final analysis the conclusion is so what? Investors large and small seek profits and wealth creation. No one really takes serious pride that they have purchased on NYSE rather than NASDAQ. Everyone wants to reduce their friction costs.

In the olden days the exchange was a club run primarily for the benefit of investment dealers who would charge the end user for the value added service. Today the exchange seeks to be competitive so that investment dealers can charge end users for a value added offering.

The exchange is in a hyper-competitive environment requiring increasing amounts of capital for technology which can be easily matched. The best one can hope for is that the stock becomes a utility with a reasonably predictable flow of revenues that creates a yield play. The core value proposition of acting as an intermediary between buyer and seller is ancient. Price competition usually disappoints shareholders.

NYX 1-yr chart:

Comments

[mslasky:]

But what is the time frame for the "utility" like character to come to fruition? While technically available to anyone, the fiscal motivation to compete with established players will be small, so the barrier to entry will be high, since the cost of purchasing the computing power would be large, and the motive for people to use a new player would be nil (no brand loyalty, why take a chance on poor execution?). The fraction of the world's populaton that "play" the market will continue to increase - and the scale efficiencies that accrue look to be large. It may take several decades for this to really play-out.

2007 Feb 02 10:17 AM

[Anand Krish...:]

Mike,

I totally agree with you. Being ABLE to do something is one thing, while actually DOING it is another.
Plus, the barriers to entry in this field are high. I agree with George in that at some point, if all the exchanges in the world were to operate seamlessly on a 24 hour platform and that a large % of trading is automated, then this becomes a yield play since there is not much growth to be had.

However, how long is it going to take to get to that point? Until then, in the next 3-5 years, the excesses would be shed out of trading (did you see the empty floors at the NYSE?), and technology would replace humans for faster execution which translates directly into more transactions. Further, job cuts decrease costs, a part of which could be plowed back into technology. Both of these add to the bottom line, and hence the expected growth in the next 3-5 years. Plus, if you add acquisitions of foreign exchanges such as Tokyo, India etc, that itself is a revenue stream, further contributing to EPS growth.

In summary, EPS growth will be derived from several vectors:

Cost cutting (Job cuts etc)
Technology to increase execution speed => more transactions
New Products (ETFs etc)
Acquisitions/Strategic Partnerships with Worldwide exchanges

This is a 3-5 year play on the globalization of finance. The only question is: Will John Thain continue to execute?

Thanks
Anand

2007 Feb 02 11:50 AM

[Ron Coleman:]

Great comments here. I would say that both of you are right on the money. There are too many barriers for small players to come in and take a large piece of the pie. And as Anad mentioned, there is a lot of consolidation in this industry, but he didn't mention Euronext. NYSE is going to be the first Trans-Atlantic exchange, and now they are looking to be Global. As you might have noticed, there has been a large push for exchanges to go public or to merge with other exchanges. I don't see there being any short term major consolidation as this is something that will take time and regulatory approval. So 3 - 5 years is a great time frame for higher growth, though there might be more growth further than 5 years out.

There are a lot of articles pertaining to this subject on FeedTheBull if you want to do more research on the NYSE.

2007 Feb 02 02:49 PM

[Greg Calder...:]

It is called guidance. A company that states an ok quarter with great guidance will do well. This gave great guidance. 4x revenue growth in the next 24 months. Don't worry about what has happened, look at what will happen. The quickest way for a ceo to lose his/her job outside of a felony, is to get caught in a lie at a conference call. Thain would not have said it if he did not think it possible.

2007 Feb 04 04:09 AM