ICE Should Break Above $120 Soon

The ICE (ICE) Management’s tone (Chairman and CEO Jeff Sprecher and CFO Scott Hill) was constructive, long-term strategy has not shifted—core franchise growth remains healthy while initiatives to layer additional growth upon that core (Russell, Clearing, Creditex) are on track. Key highlights included:

• Energy business. ICE’s core energy business is intact—OTC (+48% yr/yr) and ICEfutures revenue growth (+22% yr/yr) are strong, customer mix remains well diversified. With regards to de-leveraging, management believes ICE is less exposed given less leverage to financial products/customers but did acknowledge that a tightening of credit and higher margin levels could dampen near-term activity. While volume growth may not be linear, mgmt is still constructive in the L/T trends driving the core business.

• Russell. As of Friday, Russell transition is complete. With $11+ trillion of institutional money benchmarked to the Russell, mgmt is excited about the opportunity to nurture existing liquidity while broadening Russell 1000, Growth and Value penetration.

• Clearing. Given turbulent market conditions ICE recently postponed the launch of its European Clearinghouse; we expect the transition to now occur in upcoming weeks. No change to our 2009 outlook—we expect ICE Clear to add $0.70-0.75 EPS next year.

• CDS—stress adding value. Mgmt believes recent industry events (GSEs, Lehman, AIG) have accelerated the need for an industry solution to alleviate counterparty credit risk and feels well positioned with its recent Creditex acquisition. With respect to current Creditex activity levels, mgmt continues to see healthy levels of CDS index activity and further electronic migration amidst the market disruptions.

• Regulation. With a limited time window before U.S. elections, we do not see a high probability of legislation/resolution this year. Longer-term, mgmt believes the exchange model is one that will incorporate increasing levels of regulation over time.

• The stock. Year-to-date 2008, ICE has posted best-in-class financial performance--67% yr/yr EPS growth, 68% operating margins and a 20%+ ROE. At 12x my 2009 estimate, I view the stock as attractively valued and believe the shares are way oversold.

Additional Information

Upcoming CDS regulation will catapult ICE to $130 soon.

The top executive at CME Group Inc. (CME) said efforts to regulate the credit default swap market would help exchanges capture a larger share of the business. Craig Donohue, CEO of the world's largest derivatives exchange by revenues, said the fallout from Wall Street over the past week would "forever alter" the mechanics of the CDS market, which is largely conducted over-the-counter between banks and other parties. Donohue told Dow Jones Newswires that recent market turmoil highlights the "urgent need for a central clearing party in the CDS market and a more regulated, transparent environment."

The CME and rival exchanges have identified the CDS market as a key growth opportunity, investing in platforms and data providers in a sector where trades are now conducted on a bilateral basis.

U.S. regulators have honed in on the loose oversight of the $58 trillion CDS market, calling for greater transparency and market efficiency. Donohue said that the new constraints faced by banks in terms of credit lines, capital deployment, balance sheet strength and leverage ratios put CME's central-party clearing capabilities in demand. "The question becomes how much would the market benefit from a standardized, regulated, transparent execution capability in these markets," he said. "It's key that we have both."

It is also rumored heavily that ICE is going to be acquired by major overseas company. The potential candidates are LSE, Abhu Dhabi exchanges.

Let's make some profits on this company by investing wisely.

Disclosure: Long CME and QQQQ.