The Bull And Bear Case For The Intercontinental Exchange
Summary
- Lots of volume on the exchanges but lower prices in markets.
- A choppy market in stocks.
- A challenge for the CEO and founder.
- ICE reported earnings on April 30.
- Caution on ICE shares.
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The Intercontinental Exchange (NYSE:ICE) operates regulated exchanges, clearinghouses, and listings for commodity, financial, fixed income, and equity markets in the United States, the United Kingdom, the European Union, Singapore, Israel, and Canada. The ICE operates in two segments; Trading and Clearings, and Data and Listings.
ICE is one of the businesses that has not suffered as the global pandemic caused a self-induced coma that shuttered many nonessential companies and caused the US and global economies to grind to a halt.
ICE shares rose to an all-time high in February 2020 at $101.93 per share and was trading at around $89 on May 1, 12.7% below the peak. In mid-March, the shares dropped to a low of $63.51, which turned out to be a bargain for the brave investors that scooped up shares at the lowest price since August 2017.
ICE has a diversified exposure to markets across all asset classes. Jeffrey Sprecher founded ICE in 2020, and his wife Kelly Loeffler is a Senator from the state of Georgia. Senator Loeffler’s actions in the stock market in mid-February has raised more than a few eyebrows as she sold shares in some companies and bought others after a classified briefing about Coronavirus. The stock market dropped sharply after the sales. Meanwhile, the purchases were in companies whose software supports remote workers. Time will tell if the Senator and the founder and CEO of ICE face any further backlash and problems because of the widely publicized activity in the stock market that has drawn more than a little criticism.
Lots of volume on the exchanges but lower prices in markets
According to Zacks Equity Research, the first quarter futures and options average daily volume increased by 42% on a year-on-year basis to eight million. Energy volumes soared by 54% to 3.9 million, agricultural and metals were up 31% to 2.9 million, and equity indices rose 47%.
Meanwhile, the deflationary spiral caused by Coronavirus caused the prices of most assets to decline significantly since late February. ICE has been in business since 2000 and started its operations as an electronic platform in the energy markets. ICE’s timing was impeccable as markets moved from pit or floor trading to the electronic world. The exchange grew exponentially as it had a head start. The Dodd-Frank legislation came on the heels of the 2008 global financial crisis. It expanded ICE’s addressable market as it became one of the leading companies acting as a central counterpart clearing house for over-the-counter swap transactions in energy, fixed income, credit default swaps, and other products. ICE introduced new products and acquired existing exchanges, including the New York Stock Exchange.
A choppy market in stocks
One of the many victims of the global pandemic was the bull market in stocks. The bull was born in the aftermath of the 2008 financial crisis and died in February 2020.
Source: Barchart
The chart shows that one of the most closely watched stock market barometers, the Dow Jones Industrial Average, that after reaching a record high of 29,568.57 in February, the DJIA fell to a low of 18,213.65 in March, a decline of 38.4%. At around the 23,7400 level on May 1, the barometer was trading at just under the midpoint of the wide trading range over the past weeks. The DJIA is comprised of NYSE stocks, which is under the ICE umbrella.
The choppy market in stocks creates lots of trading opportunities. ICE revenues come from trading volume. In a world where many companies are earning no revenues or have seen their businesses decline dramatically, ICE continues to thrive. The self-induced coma in the economy did not include the financial markets, which have not missed a beat.
A challenge for the CEO and founder
Jeffrey Sprecher is a brilliant businessman. He saw an opportunity at the turn of this century, which put him in the position to run one of the most influential exchanges in the world. ICE technology in the early 2000s was far ahead of the other exchanges, which were just beginning to move from member-owned private businesses to publicly traded enterprises. The Chicago Mercantile Exchange (CME) emerged as the dominant player as it swallowed up other futures platforms. The move from pit trading to electronic exchanges required massive capital investment, and the consolidation under the CME and ICE umbrellas created economies of scale. At the same time, seat holders at the exchanges had the opportunity to cash out at attractive levels. Members surrendered their memberships for shares during IPOs and takeovers of COMEX, NYMEX, CSCE, NYSE, and many others in what was a win-win for both ICE and CME and the former seat holders.
Jeffrey Sprecher made a fortune from his foresight. In 2004, he married Kelly Loeffler, who joined ICE in 2002 and rose to the position of Senior Vice President of investor relations and corporate communications. In 2018, Loeffler became the CEO of Bakkt, a subsidiary of ICE that leveraged Microsoft (MSFT) online services to manage digital assets. Jeffrey Sprecher and Kelly Loeffler were significant contributors to the Republican party. In November 2019, Georgia Governor Brian Kemp announced the appointment of Kelly Loeffler to replace Senator Johnny Isakson, who resigned for health reasons. Senator Loeffler will stand for election in November 2020.
On March 19, 2020, in a federal financial disclosure, the Senator and her husband reported sales of shares in companies that were vulnerable to the global pandemic, with a substantial aggregate value. At the same time, they purchased shares in companies that stood to benefit from the increase of those working at home during the social distancing guidelines.
Allegations that Senator Loeffler attended a briefing on the severity of the virus and its spread before it became public knowledge led to the stock sales have caused political fallout for the Senator, and her husband and ICE, by extension.
ICE reported earnings on April 30
ICE is one of the leading exchanges in the world, and it is surviving and thriving at a time when many other businesses face the most significant challenge in history. The Senator’s scandal and potential for it to impact the company her husband founded could weigh on ICE’s plans for expansion if Mr. Sprecher remains the CEO. Meanwhile, the founder has been the guiding force at ICE. Time will tell if Senator Loeffler can withstand the political heat and win as an incumbent in November and if there is any fallout for Jeffrey Sprecher’s role at ICE. As a highly regulated business, Democrats in Congress could potentially make trouble for the company in the wake of the allegations.
Source: Yahoo Finance
The chart shows that ICE had an excellent EPS track record. The company reported Q1 earnings on April 30, and consensus estimates were for $1.24 per share. ICE beat by four cents as the trading and clearing business segment posted a 44% increase compared with the first quarter of 2019. At the $89 level on May 1, ICE had a market cap of just under $49 billion.
Source: Barchart
The chart shows that ICE has outperformed the leading equity indices as of May 1. The prospects of profits in an environment where many businesses will be suffering massive losses make ICE an attractive candidate for a portfolio, were it not for the ongoing scandal hanging over Senator Loeffler, her husband, and the company.
Caution on ICE shares
It is not a stretch to surmise that the Governor of Georgia would not have appointed Senator Loeffler had it not been for her connection to Mr. Sprecher and ICE. Political contributions and influence peddling go a long way in the system.
I am bullish on the potential for earnings from the world’s leading exchanges as they have continued to thrive during the self-induced coma in the US and global economies. Given a choice between ICE and its leading competitor, the Chicago Mercantile Exchange (CME), I would have to go with the CME. The scandal could impact not only the Senator’s seat in Washington DC but her husband’s leadership role in the company and plans that require regulatory approval.
The old saying that all press is good press may not apply when it comes to the Intercontinental Exchange.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.
He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
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Comments (1)
My relationship with ICE is a long one, as I remember the time it was created. It was really advanced in that time... everything electronically, and it was the time Brent started to trade on ICE. ICE became really world leading exchange. However as investor, I always failed to make $$ with them... since 2017 ending 2020. Some of the reasons are when its stock rise, after some period there is something stupid that after a while crushes that stock dearly...despite the market strength... be it high vol, or stupid decisions to buy Ebay, or oil crash. Despite what author is saying, ICE is a very volatile stock, and it is not holding for a lot of time! Adding that ICE options are for min month duration, not a week, as for lots of co’s, I see this stock not attractive. Somehow ICE failing to bring stability, even they hv volumes trading...Sellout of the stock by wife of Spresher is close to criminal conduct...what else - which old skeleton do they hide in the attic? and ICE goes down more time, vs as it rises, it mirrors a lot of oil volatility... ICE bot NYSE, and I like NYSE much more then ICE itself... as author praises CME, I could say it is also not much better... what they did to Nymex & WTI - ripping fruits fm record turnover, sitting & doing nothing to improve oldest world oil WTI benchmark, till the moment of 20 April 2020 when it did crash to negative(!!) level, due to rigidness of contract and old fashioned delivery point. Ignorance and greed at its finest! And this is so similar to the ICE exchange as well...ICE & CME go down, albeit with different speed, as ICE looks like smth which can hang out on the surface for longer time...