It's a bull market in everything, so how about a little bit of Nasdaq. All the FAANGs are listed there!
The stock tripled from 2012 to 2017 versus the S&P500 doubling. Nice. Can the good times continue?
Here are the key stats
| Ticker | NDAQ |
|---|---|
| Sector | Financial & Commodity Market Operators |
| Latest price | $75.63 |
| Value | $12,615M |
| Daily vol | $87M |
| Date | 12 October 2017 |
| Financials | SEC Financials, Investor Deck |
| Website | nasdaq.com |
1. What's a stock exchange these days?
Nasdaq, Inc. is a provider of trading, clearing, exchange technology, regulatory, securities listing, information and public company services. It has four segments:
- Market Services (36% sales / 43% profits);
- Corporate Services (28% sales / 16% profits);
- Information Services (24% sales / 34% profits), and;
- Market Technology (12% sales / 7% profits).
But let's dig a little, Market Services is pure trading. Corporate is IPOs and investor relations tools for companies. Nasdaq is particularly good at that. Info is both selling data on trades / etc and Indices , and Technology sells it's tech expertise to 85 other stock exchanges inc. Japan, Singapore, Hong Kong, Egypt, Turkey, Malaysia, Dubai, Switzerland, etc, etc.
So as you'd expect the core stock exchange business, has helped Nasdaq build strong franchises across the entire trading value chain.
2. And a Bull Market = $$$
The company and analysts tend to look at the net revenues, i.e. after any transaction expenses from running the stock exchange, and this has grown by $100 to $200m a year recently.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Total Revenue | $3.1bn | $3.2bn | $3.5bn | $3.4bn | $3.7bn | N/A | N/A |
| Net Revenues | $1.7bn | $1.9bn | $2.1bn | $2.1bn | $2.3bn | $2.4bn | $2.5bn |
| EPS | $2.04 | $2.25 | $2.39 | $2.50 | $0.64 | $4.17 | $4.55 |
| DPS | $0.39 | $0.52 | $0.58 | $0.90 | $1.21 | $1.45 | N/A |
However, what I find a little odd, is they did 3 big acquisitions in 2016 (ISE, Boardvantage and Marketwired), spending $1.5bn, but there is little to show for it, at the top line. Go figure! And I suspect the forecasts have not yet been updated for the announcement in September of the $700m deal to buy eVestment (which does circa $100m of sales).
Also, we need to note: that they love talking about Adjusted Earnings, reversing restructuring charges, impairments etc, to get to a rosier EPS. Gawd, I hate those shenanigans!
What's with the debt levels?
$NDAQ has $2,896M of net debt. That is 2.5x it's latest operating profit. Okay, part of it's value is an oligopoly business along side ICE/NYSE but I'm starting getting uncomfortable, given that it's debt should rise further, after the eVestment deal.
Who know when the next bear market is. But after the heady days of 2001, Nasdaq saw sales decline 3 years in a row. Though post 2008, the dip was more muted. In fact, they talk about 75% of sales now being recurring / subscriptions. So, perhaps they've diversified the business sufficiently to weather a storm?
And they think they get back to a reasonable level of debt by 1H 2019.
Rewarding shareholders?
$NDAQ pays about 30% of earnings out as dividends, which gives shareholders a 2% yield. They do repurchase stock, a bit, but it's mainly to reward employees. And with the current debt levels, I find it hard to believe there's a substantial buyback round the corner.
2. How's it look versus it's peers?
Although it's got the bulk, it's not standing out on margins or returns.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Nasdaq Inc | $3,873M | 30% | 4% |
| US players | |||
| Intercontinental Exchange Inc | $4,558M | 63% | 10% |
| CME Group Inc | $3,609M | 69% | 8% |
| CBOE Holdings, Inc | $1,328M | 34% | 11% |
| MarketAxess Holdings Inc. | $386M | 57% | 31% |
| OTC Markets Group Inc | $53M | 38% | 64% |
| Others | |||
| London Stock Exchange Group Plc | £1,657M | 46% | 8% |
| Deutsche Boerse AG | €2,674M | 52% | 18% |
| TMX Group Ltd | C$ 804M | 47% | 7% |
And if I look at the commentary in the Investor Deck, they talk of mid-single digit organic growth, with a target of double digit shareholder returns. i.e. they'll need to increase margins and do some accretive M&A.
And the price?
But all this translates into a rather unaggressive valuation, at least versus the behemoths at ICE/NYSE or the CME Group. Are they really in a better place strategically?
I have to look at the Toronto Stock Exchange to find a cheaper exchange!
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| NDAQ.O | $12,615M | 18x | 10% | 2% | 5% |
| US players | |||||
| ICE | $41,247M | 24x | 12% | 1% | 6% |
| CME.O | $46,632M | 29x | 9% | 4% | 6% |
| CBOE.O | $12,304M | 32x | N/A | 1% | 4% |
| MKTX.O | $7,196M | 48x | 20% | 1% | 3% |
| OTCM.PK | $343M | 29x | N/A | 4% | 0% |
| Others | |||||
| LSE.L | £13,593M | 26x | 18% | 1% | 5% |
| DB1GN.DE | €18,239M | 20x | 10% | 3% | 7% |
| X.TO | C$ 3,806M | 14x | N/A | 3% | 9% |
3. Wall Street isn't convinced
Well I suppose the professionals on Wall Street are the ultimate insiders in the case of stock exchanges! So it's not encouraging to see a Hold recommendation and a consensus target of $80, i.e. just 5% above the current price.
That dis-interest is despite the company meeting or beating expectations every quarter for the last 3 years.
4. Trading
The stock's traded between 16 and 19 times earnings the last 2 years. Seen a steady rise of all it's metrics and been focused on sensible M&A. Yes, it's a quality stock, good value relative to the other players, with a sensible strategy to create value.
But, exchanges are one of the ultimate beta plays. And we are closer to the end of the cycle that the start. Of course it can move higher from here, but I don't see how it's valuation gets re-rated or it accelerates earnings.
So I think I'll place my trade elsewhere, ignoring the home of the FAANGs.
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Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 13, 2017 at 07:09AM by shane_stockflare http://ift.tt/2yhVbZH
