Intercontinental Exchange Will Benefit From A Correction And Grow Your Wealth For Decades To Come

Summary

• No matter what causes volatility in the market, ICE is set to benefit, greatly boosting its financials during these periods.
• The company is very focused on returning capital to shareholders both through rapid dividend increases and aggressive buybacks. We forecast returns near the low double digits going forward.
• ICE is a stock that should keep creating wealth for decades to come while temporarily boosting its performance under market uncertainty.
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During times of market highs, investors tend to discuss the possibility of an upcoming correction. In my recent Amazon (AMZN) article, I highlighted why equities are more likely to remain in high demand due to the lack of real returns in bonds. However, we can't exclude the possibility of a healthy correction in the market, which may be a great opportunity to scoop up some equities.

In this article, we want to take a look at an investment idea that will not only benefit from a potential correction, but at the same time is an excellent long-term wealth generation machine. That is shares of Intercontinental Exchange (NYSE:ICE), the owner of the New York Stock Exchange.

The benefits of a potential correction

The reason exchanges like Intercontinental benefit from volatility is because they generate higher transaction volumes due to increased buying and selling, which means that they receive higher fees and achieve higher transaction-based revenues.

While the company's stock may also tumble during a period of violent volatility, its financials should benefit. For example, if we take a look at ICE's revenues over the past several quarters, we can see a distinct jump in its energy futures and options contracts section during this year's Q1, followed by a not as impressive but equally nice Q2 bump. Everyone remembers March's brutal selloff. During that quarter, the segment's revenue increased by a massive 56.4%. Following April's rebound, Q2's segment revenues were also strongly boosted by 15.5%.

Source: Key metrics release, Author

During the last selloff, energy futures were particularly active due to oil's crazy roller coaster ride. However, in a future correction, ICE is set to benefit from all sorts of increased activity volumes, like agriculture futures, which are currently mostly stable.

Source: Key metrics release, Author

No matter what causes volatility in the market, ICE is set to benefit, greatly boosting its financials during these periods. As you can see, its total operating income was significantly boosted during the previous period of full-on panic in the markets. In Q1, the company achieved a one-off operating income growth of 32.6%. Therefore, future volatility will really boost its short-term income, which a very welcome scenario.

Source: Key metrics release, Author

Hence, we believe that the company makes for an excellent pick for those who forecast such a situation, as the company's profits are likely to increase further. However, what we like about ICE is that besides such short-term perks, the company hardly relies on those to keep on growing and creating shareholder value. Even if such one-off profit boosters are absent over the next few years, the company remains incredibly focused on boosting shareholder returns.

Capital returns, valuation, and shareholder returns

Since the company introduced its first quarterly dividend in 2013, dividend growth has been phenomenal, featuring a 5-year CAGR (compound annual growth rate) of 16.2%. At the same time, stock repurchases have to become larger and larger over the years. Despite slowing down its buybacks during Q1 and Q2, ICE has repurchased around $1.66B of its stock over the past 12 months, which is quite a large amount considering it accounts for 2.7% of its market cap.

The company's aggressive buybacks are not only a great way to boost shareholder value, but they also confirm that management believes that its stock remains under/fairly valued. In fact, at a forward P/E of around 23, ICE may actually be pretty attractively priced. For a company whose revenues will increase upon panic in the market while continuously growing almost regardless of the state of the underlying economy, ICE's current valuation is definitely not expensive.

(The recent pump in shares outstanding was due to its acquisition of Ellie Mae.)

In terms of future shareholder returns, we expect the company to grow its EPS annually by around 8%, powered by organic growth, its data services snowballing, and stock buybacks. We also expect the DPS growth to remain at its current rate, around 9%.

Source: Investor Presentation

These figures are likely to be quite higher. For instance, the company recently reported very encouraging futures and options metrics. During November, total futures and options ADV were up 7%, NYSE cash equities ADV grew 44% Y/Y, while their respective options surged 96% Y/Y. Still, we prefer to remain prudent. Coupled with its other segments and buybacks, EPS should grow at a faster rate.

By combining these growth rates to ICE's current price and a reasonable range of future valuation multiples, we see that the stock should more than likely generate annualized returns near the double digits.

Source: Author

Conclusion

Despite the fact that exchanges will benefit from an increased volume in transactions amid a potential correction, they are great investments regardless of market conditions. In fact, Intercontinental Exchange and its peers such as Nasdaq (NDAQ), the CME Group Inc. (CME), and Cboe Global Markets (CBOE) have outperformed the market in terms of total returns by a considerable margin over the past decade. While short-term boosts to its profits like those in Q1 2020 are definitely welcome, ICE is a generational holding with attractive expected returns ahead regardless. Due to the oligopolistic nature of exchanges and their almost recession-proof cash flows, ICE shareholders are most likely to enjoy decades of wealth appreciation going forward.

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.