NYSE Euronext: Welcome to the Big Board

NYSE Euronext (NYX), the holding company for NYSE Group, Inc. and Euronext N.V., operates an exchange group and offers a diverse array of financial products and services. It brings together six cash equities exchanges in five countries and six derivatives exchanges offering listings, trading in cash equities, equity and interest rate derivatives, bonds, and distribution of market data.

NYSE Group operates two securities exchanges, the New York Stock Exchange LLC [NYSE] and NYSE Arca, Inc. It provides securities listing, trading, and market data products and services. The NYSE is an equities exchange and provides an orderly, liquid marketplace where investors buy and sell listed companies, common stock and other securities. NYSE Arca, an all-electronic stock exchange in the United States, engages in trading exchange-traded funds and exchange-listed securities, as well as equity options. Euronext N.V. is a cross-border exchange providing international services for regulated cash markets and derivative markets in Belgium, France, the United Kingdom, the Netherlands, and Portugal. The company was founded in 1792 and is headquartered in New York, New York.

Financial Results

NYSE Euronext, the world's biggest stock market, said on March 6^th, 2008 that trading volumes in February were very strong. The Euro Cash market volumes rose 43% year-over-year, and US Equities volume also rose by a 20% growth rate. Derivative volumes also rose on both sides of the Atlantic – European derivative volume rose by a 37% metric, and US derivative volume on the NYSE rose by over 70%!

NYSE / Euronext’s plans to expand into areas beyond just equities trading is paying off, particularly in the derivatives industry. NYSE is also actively closing on its deal to acquire the AMEX.

Analyst Expectations, Forward Quarters

Looking at the current expectations for the Company, NYX is expected to achieve $3.29 in earnings per share this year (ending Dec 2008), putting the current P/E ratio for the Company at roughly 14x its expected calendar year forward earnings. 2009’s earnings are forecast in a range from $4.56 per share in EPS on the high end, all the way down to $3.87 on the low end. We foresee an annual rate that is in line with that $4.00 per share estimate, possibly slightly higher, accounted for by additional tax savings, and by a probable acquisition of an options exchange (or additional other exchanges, for that matter).

We see growth rates of the firm’s underlying exchange traded business growing at above-average rates for as long as the global liquidity crisis drives volatility and volume through the exchanges. John Thain, ex-CFO of Goldman Sachs (GS), has proven himself to be an excellent CEO of the NYX, guiding the firm through its $14 billion acquisition of Euronext. Additional possibilities of cross-cooperating with the Tokyo Exchange [TSE] as it endeavors to go public in 2008 will also add to the bottom line. Growth is on the horizon here, and we would encourage investors to be part of it.

The current chart of NYX deserves another look:

Chart Discussion

Investors have knocked down NYX’s shares lately; there’s no two ways to sugar coat that. There has been a radical drop of about 20% within the latest month, leading to a trailing 52 week performance of these shares of -28%.

We think we could see stabilization at current levels, and then we’d hope to see additional improvement in the RSI and MACD lines, which measure relative strength and divergence from the moving averages, respectively. Previous highs were in the $105 - $110 range, so today’s $60 price is a solid discount to those highs.

Investment Recommendation

We recommend that investors accumulate NYX shares at or below $60 per share, with a target exit price of $90 per share, reflecting a 50% increase. This valuation is based on a 23x multiple of NYX’s expected 2008 earnings of $4+ per share.

Multiple Trade Ideas

Buy the stock outright/ write covered calls at intermediate points: We would commit 50% of the capital balance investors would like to commit to this company at present levels Monday Morning, March 10th, 2008, at or below $60.00 per share, and then look to add another 50% position if the stock price declines to a level of $57.50 or lower. The two-stage buy recommendation is based upon possible activity in the stock relative to interest rates and general market movements. On any shares purchased at or below $60, we would look to write June 2008 expiration covered calls at the $70.00 strike price or higher against this long position. Currently those calls are (Friday 3/7/08) bid at $2.65 per share. We would also put a stop loss sell order on the shares acquired at these levels recommended above, at a price of $54 (approximately 10% down from an individual’s acquisition price).

Option trade suggestions: Our written put strategy calls for investors to sell, or “write” the June and September 2008 expiration put options on NYX at the $60.00 and $55 strike price. Current bid prices at Friday 3/7/08 close were $5.65 for the June 2008 60 puts, and $5.35 for the September 2008 $55 strike price puts. Current premium levels reflect that investors implementing these positions will enjoy either a nearly 10% return on their committed capital (assuming no stock is assigned and the option premiums are all kept), or they will be able to purchase NYX stock at an adjusted net price level of roughly $52.50 per share (accounting for option premiums), a significant discount to the present market price. The final price an investor will pay is dependent upon how many of the options are assigned over the life of the position and the transactions costs. For investors who do not wish to open the transaction with completely ‘naked’ put positions, buying the corresponding month $55.00 or $50 strike price put will limit the downside, should NYX’s stock price decline below $55 per share (in June) or $50 (through September) through expiration of the respective months.

Bullish Call Spread Suggestion: Buy the June 70 calls and sell the June 80 calls. This will give option buyers an opportunity to sell capitalize on an upward move (June 80 calls are presently $0.93 bid) which offsets the cost of the lower strike price calls (June 70 calls are $2.74 ask), giving an option investor a net cost for June 70 calls of $1.81 ($2.74 minus $0.93). In this situation, option investors want the stock to rise past the level of $71.81 (Strike price of $70, plus the net cost of $1.81) to breakeven. The greatest profit would be if the stock went to $80 or higher, giving you a full $10 payback on the $70 strike price options. We would look to exit these calls if and when the stock price crossed the $80.00 level, reflecting a value in the June $70 strike calls of at least $10, which would be offset by the cost of buying back the short $80 strike price calls. It will still be a solid return.

Disclosure: Analyst has no position in NYX stock, long call spreads, covered calls or written puts described in this report.