Time To Look At The Exchanges

Includes: CME, ICE
by: Bret Jensen

The start of the trading week Monday has brought one of the deepest declines in the market so far in 2013. Triggered by a commodity sell-off led by a $135/ounce dive by gold, indexes are down over 1.5%. Mining, Materials & Energy are among the worst performing sectors of the day. Financials & Technology are holding up well given the extent of the pullback. I have been thinking more money will be shifting to these two sectors given their cheap valuations, longer term growth prospects, dividend yield and how bid up some of the defensive sectors of the market (Consumer Staples, Utilities & Healthcare) have gotten.

One part of the financial complex that are worth looking at if this pullback continues are the exchanges. Mergers over the last few years have substantially narrowed the playing field. Two I like here are highlighted below.

CME Group (NASDAQ:CME) operates the CME, CBOT, NYMEX COMEX, and KCBT futures exchanges worldwide.

4 reasons CME is a buy at $59 a share:

  1. For income investors, the stock yields 3% and has doubled its dividend payouts over the past five years.
  2. For value investors, CME sells at less than book value (94%) which is near the bottom of its five year valuation range based on that metric.
  3. Jefferies just raised its price target to $69 from $65 a share on CME. S&P has a "Buy" rating and a $70 price target on the shares.
  4. The company sports an AA- rated balance sheet and consensus earnings estimates for both FY2013 and FY2014 have ticked up over the past two months.

IntercontinentalExchange (NYSE:ICE) operates regulated global markets and clearing houses primarily in the United States, the United Kingdom, Canada, and Brazil.

4 reasons ICE has upside from $155 a share:

  1. Jefferies upped its price target Monday to $185 a share from $170 a share previously. Credit Suisse has an "Outperform" rating and a $190 price target on the shares.
  2. The company is projected to raise revenues by just over an 8% CAGR over the next two years.
  3. The exchange has more than doubled earnings over the past five fiscal years despite the financial crisis and earnings are expected to increase in the low double digits for both FY2013 and FY2014.
  4. The exchange has easily beat earnings estimates the last three quarters and consensus earnings estimates for FY2013 and FY2014 have ticked up over the past month.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CME over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.