02 August, 2007

NYSE Euronext Profit Jumps as Exchanges Combine

NYSE Euronext (NYX), this morning reported their first quarter as a combined entity of NYSE Group and Euronext and the results year-over-year were strong. On a straight-up basis NYX reported earnings of $0.62/share vs. $0.39/share, with revenue rising to $161Million up from $60Million. That's an over 160% increase. But before we pop the champagne corks lets look at the relative numbers. Due to share increases from the joining of the two companies and other related costs adjusted earnings were also released.

On this adjusted basis NYX earned $0.65/share vs a year ago $0.50/share and the street's expected $0.64/share. Analysts have said that favourable tax rates led to the earnings upside. Net Earnings on this basis were reported as $172Million vs. a year ago 133Million. Up almost 30%.

The company said that they are continuing to look at merger or buyout possibilities but assured investors that these will be undertaken with the utmost discipline. Investor fears of late have centered around the company having to drastically overpay to acquire assets in the Exchange space. Euronext experienced a record increase in trading and the NYSE had its biggest trading volume quarter ever with over 166Billion shares traded. The growth story in NYX in seen through these raw listing, trading and volume numbers. With 1.4Billion in cash at the end of the quarter, and a gain of almost $600Million from the sale of LCH Clearnet in hand, the company looks to be readying the war chest for further acquisitions. The words of management regarding patience and diligence before moving forward with deals should be met favourably by investors.

One area of contention may be the statistics that show the decrease in trading share for NYX on its own exchange. Nasdaq Stock Market (NDAQ) is making inroads in trading NYSE listed securities as the market share for NYX fell from 74% to 63%. It is a very competitive industry as these two American exchange heavyweights fight for a majority share of trading volume. With record volumes being reported across the exchanges, I believe this fall will be neutralized and NYX will settle with a majority of volume in the 65-70% range. Any further market share losses would certainly be a talking point in the quarters to come.

NYX, now sports a trailing P/E of 37, however this will continue to adjust downwards as the effect of Euronext is seen on the companies earnings. Forward P/E is a better barometer in this case and rides in the low 20s. For a company with this much organic growth, it almost looks like a value play and this kind of talk should have long term investors excited about future company and stock prospects. Case in point the Price earnings Growth ratio sits at well under 1, given these most recent results and this would be expected to normalize in the coming quarters.
I believe the further upgrades will be coming soon as will price target increases.

The average estimate of $3.35 for CY08 has substantial upside if NYX can continue to show the organic trading and listing growth it has demonstrated. Let along the trading giant uses its cash to buy another asset and bring it into the fold. With almost 10% of its market cap in cash, and a Price to sales under 10 there is room to expand numbers for 2008 and with this can peg 2008 earnings near $3.50/share. Applying a P/E of 30 would bring a target price of $105 into next year. This is on the high end of analyst estimates but it is a level that is attainable if the company stays the course. Downside risk seems minimal from these levels and as such investment could represent as much as 40% to the upside. A rock solid business model, increasing organic metrics and potential acquisitions on the horizon there's a lot to like here.

Disclosure: Author is long NYX

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