Revisiting the NYSE Euronext Trade

With the market at extremely oversold levels, we issued our second inter-week pick yesterday, on top of the regular Monday analysis ("Tesoro Corporation: Upside Potential Overlooked").  It is our feeling that here is a great opportunity to pick up great values on very good companies. 

In that light, today we're revisiting NYSE Euronext (NYX),  which has endured a dramatic sell off in the shares of the firm since our last recommendation on 4 June 2008.  On that day, we recommended looking to buy NYX at $57.50, among other things.  If we liked it at $57.50, we must love it at $47.50, right?  You bet we do.  We're pounding the table to buy NYX today, and go long the September calls.  We expect a very strong resurgence coming to these shares as the value inherent in the NYSE franchise comes out.  In our opinion, the selloff in the shares to date has taken the exchange's stock price to unwarranted levels.

Recommendation

If you haven't bought the stock, now is a good time to put in a buy order on NYX at $47.50 per share.

Previously, on 4 June 2008, we recommended a sale of the September $55 puts for $2.50. We would look to also now sell the September $45 puts for $3.10 or better.  This will give you a weighted average net cost on NYX shares if you are assigned on both strikes of $47.20.  If you are only assigned on the $55 strike prices puts, but get to keep both premiums, this will get you NYX at a net cost of $49.40.

Also, on 4 June 2008 we recommended creating a call spread by going long the September $65 calls for $4.00, and selling the September $75 calls for $1.30, giving a net cost to the spread of $2.70.  We recommend buying back those NYX September $75 calls at this point, at $0.15 or less to close that liability of having short calls.  We also recommend buying NYX September $50 calls today at $3.25 or less.  Whether or not you close (sell) the September 65 calls at $0.40 or better is up to you.  If taking that loss is advantageous for either tax or other reasons, they could be closed.  We prefer to continue to hold them for now and look to exit at higher prices to recover additional capital.

Technical Analysis

The chart above shows NYX for the last six months. The stock has fallen off a cliff in the last 30 days, dropping nearly 21% from $60 to $47.50. If you look at the $75 price NYX held back in May, it has fallen by nearly 37%. This selling is overdone. The Relative Strength Index [RSI] and Moving Average Convergence / Divergence [MACD] stochastic lines are both rounding out at low levels, indicating a bounce, at least on a technical basis, could be coming.

NYX Fundamental Data

• Current Price: $47.70
• Shares Outstanding: 265 million
• Market Cap: $12.7 billion
• Forward Price / Earnings (avg. Est): 11.7x
• PE/G Ratio (5 Year Expected): 0..7x
• Price / Book: 1.3x

NYX continues to see growth in its quarterly revenues, despite the market's volatility - or perhaps because of it. On a quarterly basis, revenues have risen by about 8% annualized, and analysts are expecting a $3.3 billion dollar revenue year for the full year 2008. For the year ending December 2009, expectations are that revenues climb above $4 billion. Earnings estimates have all been stable, with 2Q08 estimates staying at $0.78 per share for the last 90 days, and full year 2008 estimates remaining in the $3.30 range per share. From a price / earnings ratio perspective, we feel there is not much downside risk here.

NYX's earnings releases over the last four quarters have not featured any disappointments either - to the contrary, there have been positive earnings surprises of 4% to 9% happening. NYX's balance has $1.66 billion in cash, or about $6 per share. The debt they carry though, amounts to over $3 billion. The firm's EBITDA is $2.62 billion on a trailing twelve month basis. That gives us a solid comfort level that NYX and its cash flows are stable and can support the debt in a very consistent manner.

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 NYX stock or NYX options.

Comments

[Richard Wendling]

As the world markets continue to deteriorate this issue along with the DJIA will continue to move lower. In my estimation this issue has only dropped about half of what I expect it to. If you are interested in reading my recommendations on this issue and what I base them on click on my site for more information. You will be amazed at how these issues are manipulated right under the investors noses.

Richard

[echotoall]

NYX is seemingly a value play here, but any thoughts on the added regulatory aspect via the commodity trading that will come down?

NYX is not alone in its drastic decline. All exchanges are seeing it, which tells me some major shifts (or fear of a major shift) are going to take place via how electronic commodity exchanges operate in the future. (ultimately leading to slower growth until there is a reacceleration within the confines of the new rules)

[John Egan]

Richard Wendling- I tried to view your opinions, but could only find your two sell recommendations for NYX ... When I clicked on the Ticker, nothing happened...

However, I have been watching this equity as well and am waiting for a turn back off the bottom.. Don't see it yet ..I like to see it come off a low Weekly Stochastic and then turn up past 20 on the daily before buying ....

It does truly have some amazing numbers as far as earnings and revenue though...

Thx jegan ;-)

[Jmar11]

Very interesting article. NYX has gotten hammered since this article. I wonder if Mr. Jones is still optimistic.
NYX may start doing very well in the fall, when a central clearing house for credit derivatives in launched. NYX could be a huge beneficiary of this move; some more details here:
www.greenfaucet.com/th...