Euronext Looks Strong on Improving Euro Volumes

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Includes: CME, ICE, NDAQ, NYX
by: Ryan Barnes

I’ve been doing some thorough review of the holdings within the Secular Trends Model, as I see this earnings season as a major harbinger for the rest of the year. NYSE Euronext (NYSE:NYX) has been under the microscope the past few days, although I’m still awaiting the volume report for June, which should be released in the next 48 hours.

Trading is Alive & Well - Volatile, But Well

To say that today’s market is baffling would be both unsurprising and boring; to say it’s “unprecedented” would employ needless hyperbole….and also be unsurprising to anyone with a dollar and a pulse. But how’s this for surprising; the parent of the stodgy ole’ Big Board has a higher Beta (1.84) than either Chicago Mercantile Exchange (NASDAQ:CME), Intercontinental Exchange (NYSE:ICE), or Nasdaq OMX Group (NASDAQ:NDAQ) (1.37, 1.72, and 1.17, respectively) despite NYSE Euronext sporting a 4.60% dividend yield?

It’s a humdinger for sure. But despite the volatility, I continue to really like NYX’s prospects, and I love the valuation. As I’ve noted before, there is a price war going on with new trading platforms, and NYSE has indeed lost some market share in the past year. But they’ve smartly decided to take a breather from the acquisition racetrack, and as a result they’ve already exceeded their 2009 targets for cost cutting of $120 million annually. NYSE now expects to wring $220 million of savings out of the AMEX acquisition, which will help them in their continuing battles with the upstart platforms.

European Volumes Improving

A big reason the earnings took a 50% hit in the first quarter (see the press release here) was due to falling volumes in European cash markets. But looking over the May ‘09 volumes report I see that average daily volumes stabilized across the pond, while derivatives volumes were up more than 25%, both YoY and sequentially, thanks to the continued success of the Bclear OTC service.

This summer will likely be a cool period for volumes around the globe; there’s simply a lot to digest and a lot of cash willing to wait out 2nd quarter earnings. But NYSE’s domestic volumes are all doing splendidly YoY, with derivative volumes up over 50% and cash volumes up 40% (as of May).

Earnings Estimates Look Primed to Pop

I see a good chance that the company raises its guidance in the next month - consensus estimates currently call for $1.86 - $2.00 for the year, which would put a run-rate P/E of 13.5x on the shares. There are also several catalysts for future growth, including more listings from key international markets (China, India, Brazil), exchange-based mechanisms for carbon trade, and an increase in IPO output from the current level of….basically none. The tailwinds plus the dividend (if investors finally decide this is worth noticing) could help push shares towards the mid-$30’s by year end.

Disclosure: Author does not hold shares in the companies mentioned. NYX is a 2.5% weighting in the Secular Trends Model Portfolio.