Intercontinental Exchange Inc. (NYSE: ICE). We expect volumes to remain strong in the near term while the company manages expenses and further boosts its operating margin.
The company is also benefiting from increased market volatility and from the recent acquisition of Ellie Mae.
We note that the NYSE remains the popular choice for large new offerings of common stock. In 3Q20, NYSE helped companies raise $57 billion, including $35 billion from IPOs, up 35% from 3Q19.
Other growth drivers include an 89% increase in fixed-income and credit revenue, as well as a 9% increase in Exchange Data and Feeds revenue. The company is also making a push into the mortgage market with digital solutions for real estate transactions, mainly at the closing, post-closing, and secondary levels. The combination of Ellie Mae, MERS and Simplifile allows ICE Mortgage Services to touch almost all U.S. mortgages from origination to close.
In October 2019, the company launched an ETF Hub, joined by Blackrock and other providers. In the interest rate segment, the company integrated its MOVE indices into ICE Data Services. In the Digital Asset segment, through Bakkt, the company launched the first physically delivered Bitcoin future.
The beta on ICE is 0.62.
On October 29, ICE reported 3Q20 adjusted EPS from continuing operations of $1.03, down from $1.06 a year earlier. Adjusted EPS excluded $0.32 for the amortization of acquisition intangibles and other special items.
On August 6, ICE agreed to acquire Ellie Mae, the leading cloud-based platform provider for the mortgage industry. Ellie Mae is valued at $11 billion. On August 17, ICE priced $6.5 billion in senior notes. The company intends to use the net proceeds from the notes, along with the issuance of commercial paper, and/or borrowings under its revolving credit facility, to finance the cash portion of the Ellie Mae acquisition.
Despite record volumes in almost every asset class, activity on various exchanges used only 35%-50% of the company’s capacity.
EARNINGS & GROWTH ANALYSIS
Data & Listings (50% of 3Q20 revenues) and Trading & Clearing (50%). We look at recent trends and forecasts for these businesses below.
Data & Listings revenue rose 5% on a constant-currency basis in 3Q. Data & Listings has three subsegments. Exchange Data and Feeds (27% of revenue) rose 9%; and Desktop and Connectivity (16% of revenue) rose 3%. Listing revenues accounted for 16% of net revenue and fell 2% in 3Q. Management has provided 4Q data revenue guidance of $590-$595 million.
Trading and Clearing segment revenues, which are derived from energy, agricultural & metals, financials, cash equities and equity options trading, rose 6% in 3Q on a constant-currency basis. Energy (32% of revenue) fell 14%; Ags & Metals (8% of revenue) fell 11%; Financials (11% of revenue) fell 16%; Cash Equities & Equity options (10% of revenue) were flat; Fixed Income & Credit (27% of revenue) rose 89%. OTC and Other revenue accounted for 12% of total revenue. This segment will continue to benefit from market volatility and increased demand for hedging products.
Expense discipline and merger-related savings have been a long-running theme for ICE. Management expects 4Q20 adjusted operating expenses of $695-$705 million. It also looks for full-year capital expenditures of $410-$420 million.
FINANCIAL STRENGTH & DIVIDEND
We calculate a debt/equity ratio of 78% as of September 30, 2020, a significant increase due to the financing of the Ellie Mae acquisition.
MANAGEMENT & RISKS
Jeffrey C. Sprecher founded the company and became its CEO in 2000. Ben Jackson is the president. Scott A. Hill is the CFO.
ICE provides very specific guidance to investors in terms of expectations for operating expenses, including expense synergies from the consolidation of IDC, expected tax rates, and the diluted share count.
Investors in ICE face numerous risks.
The acquisition of NYSE Euronext gives management another opportunity to reduce costs.
In August 2019, the London Stock Exchange agreed to acquire financial data analytics provider Refinitiv Holdings, adding more competition in the data segment from an exchange provider.
ICE shares are trading at 19-times our 2021 .The low-beta shares (beta of 0.62).