With NYSE Euronext (NYX) seeking regulatory approval for its merger with Deutsche Boerse AG (DBOEY.PK), the third quarter earnings call November 3, will be a significant date for many investors. Analysts currently rate the stock a "buy" and shareholders of both companies remain overwhelmingly in support of the transaction. Antitrust concerns over derivative monopolization linger among regulators, but, in my view, the deal will almost assuredly come to pass. Given this likelihood, I find that there is little risk inherent in going long NYSE Euronext. NYX currently trades at only 11.4x and 8.5x past and forward earnings, respectively, while offering a sizable dividend yield of 4.85%. DB meanwhile trades at only 11x past earnings and offers a 5.5% dividend yield. Although investors have reason to be wary about a double dip, I believe that financials have been hit irrationally and are now trading below intrinsic value in most cases. NYX is showing solid metrics ahead of the merger.
During the third quarter earnings call, you can expect a few key results to be highlighted. First, I find that the company is experiencing solid activity volumes, particularly in European derivatives. Nearly 4.3M contracts per day were reported in this area. Additionally, cash equities accelerated in Europe with a record 2.2M trades per day in August. Domestically, US cash equities are growing with NYSE's market share of volumes rising to around 28%. Finally, the sale of NYSE Amex Options has improved revenue and growth opportunities elsewhere.
And of course, investors will hear about the progress of the merger, which from my understanding is proceeding well. On November 17, both firms are to present their case to the European Union regulators. This will focus mostly on the concessions that both financial companies have made to maintain competitive markets, particularly in regards to derivatives.
At the second quarter earnings call, CEO Duncan Niederauer explained the merger process thus far:
[A] key list of integration planning topics was identified early in the [merger] process and resulted in an increase in our synergy targets as we found more similarities than originally assumed. For example, we were able to find more common ground than we expected on our future IT architecture. Already in the second quarter, we have formed a joint and dedicated integration planning team, named the senior managers in charge of running the integration planning effort and established full-fledged integration teams including divisional experts and project support personnel. The future management team is also working to set the goals and priorities for the integration planning process until closing, so we feel very confident as a team, that we have set ambitious and achievable targets...
Lastly, while the integration teams will continue to drill down into the synergy targets, we will also begin to focus on some of the softer aspects of the integration, including setting the foundation for the harmonization of our 2 cultures. This is a complex cross-border deal and our goal is to create a culture of performance that matches our leadership position in the global exchange space.
My concern is that the "teams" are suggestive of a kind of bureaucratization that will cause inefficiency and waste. As for the implications of culture clashes - I find this much too exaggerated in merger talks. While a German-American combination is, admittedly, awkward for national pride, from a business perspective, financial services has long gone global and can swallow the integration with ease. In my view, it will be business as usual when the merger is completed.
With NYX already on target to reach $1B in revenue for Information Services and Technology, the IT integration will help quicken the process through unlocking synergistic value. Ash Trading and Listings will also experience substantial gains from the merger. NYSE Euronext is the world's #1 IPO destination and facilitated 55% of the tech IPOs year-to-date.
Consensus estimates for EPS are that it will grow by 24.9% to $2.61 and then by 11.1% and 15.2% in the next two years. 9 estimates have been revised upward, while 2 have have been revised downward. I model revenue growing by a CAGR of roughly 8% over the next two years. ROE is set to increase by 220 basis points to 11.3% in 2013. Given this backdrop, I find myself in agreement with most analysts that NYX is a "buy."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.