Get to NYMEX - Before CME Does

This week we're visiting another publicly traded exchange - the New York Mercantile Exchange, or NYMEX, (NMX), with a buy/write recommendation.

Currently, NMX is the subject of a merger bid from the Chicago Mercantile Exchange (CME) which values NMX at around $85 per share. The exact conversion ratio for each share of NMX is 0.1323 shares of CME and $36 cash. CME stock has declined significantly lately, dropping from a high of over $700 per share in December of 2007 to a recent (June 9, 2008) level of $386 per share. This has had the effect of dropping the value of their bid on NMX to nearly $85 a share right now, which is not sitting particularly well with the shareholders and seat owners of the NMX. There is quite a bit of chatter of demanding either a higher bid, or rejecting the bid outright.

Both groups are enjoying significant growth in their core trading activities - with activity in the agricultural, energy and commodity pits showing record levels of transactions volumes and prices. However, in the last 90 days, there have been reductions to the overall profit estimates of both groups, with CME's full year 2008 profits now estimated to be $17.91 per share, down from a recent level of $19.44. Most of those revisions have come within the last 30 days, actually. CME's 2009's EPS estimates are also being reduced by a similar sized $2 per share, to a level of $22.36 for next year.

NMX shares have also seen reductions in estimates, although the magnitude of the change is on the order of $0.10 - from a previous level of $3.60 per share in 2008's full year EPS to a present level of $3.50. Next year's EPS estimates for NMX have similarly held steady at $4.50 per share, representing a very strong level (over 25%) of Y-O-Y growth in both revenues and bottom line earnings for NMX.

The NMX balance sheet is very tight, with over $557 million in cash on the books, or about $6 per share, offset by only $80 million in long-term debt. CME has a larger cash pile, of just over $1 billion, with $164 million in debt.

Fundamental Data

• Current Price: $83.60
• Shares Outstanding: 94.8 million
• Market Cap: $7.9 billion
• Forward Price / Earnings (avg. Est): 33.2x
• PEG Ratio (5 Year Expected): 0.6x
• Price / Book: 8.1x

Technical Analysis

 

 The chart above shows NMX for the last six months. The stock has come down to support in the low $80's range. The Relative Strength Index [RSI] and Moving Average Convergence / Divergence [MACD] stochastic lines are both bottoming out right now, giving us an opportunity to buy one of the few publicly traded exchange marketplaces at a great price.

Investment Recommendation

Our recommendation this week is to buy NMX at its present $83.60 level, and write the September 90 calls against the shares. Those calls can be sold this afternoon (June 9) for $4.30 to $4.60, so we would look to get at least $4.40 per contract.

If the shares are called away at $90, an investor would get the $4.40 option premium, plus $6.40 in appreciation to $90 per share, for a total return of $10.80 on a $83.60 investment, or 12.9% for a 103 day holding period. If the shares are not called away, that is still a 5.2% income yield on the option premium.

We also very much like the following written puts: The NMX September 75 puts for $3.60 would put NMX shares in your portfolio (if assigned) at a net cost of $71.40, or the September 80 puts for $5.30, which would put those shares to you at a net $74.70. Both of those positions would be very attractively priced acquisitions for NMX shares. If / when you're assigned those shares, we'll again look at covered calls on the name.

Although there is some ongoing review of whether or not this deal will go through - and again, the NMX shareholders / seat holders are not viscerally happy with the present value of the bid, we believe that either way, these options positions will prove valuable. If the deal goes through, NMX shares will get the value of the CME fractional shares, plus cash, and we believe that value HAS to be higher than the present $85 value or it won't get done.

If the deal doesn't get done - a net price of mid to high $70's for NMX stock will be a great acquisition price and a great place from which to start writing covered calls on your NMX stock.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Disclosure: Analyst has no position in NMX stock or NMX options.

Comments

[BlueDog]

Nice call. NMX is trading in the $90's after DOJ approved the merger with CME today.

[Daniel Jones]

Yeah, that was a nice little double digit return in a very short time. Hey, if you liked that one, and you made some coin, you should subscribe to our newsletter and get the picks ahead mailed directly to you rather than waiting a few days for SA to publish. We always give our subscribers a few days pre view before publishing here, FWIW. Pretty reasonable cost too...only $250 if you subscribe before July 1.

Cheers,
DJ