Catalysts That Make Intercontinental Exchange (ICE) A Buy

By Yaser Anwar, CSC of Equity Investment Ideas

• Trading in ICE’s futures and OTC products has increased substantially over the past two years thanks to volatility in the energy markets, increased interest in alternative investments, and an expansion of its product offerings.
• In the 4th Q of 06, ICE agreed to acquire the NYBOT for approximately $1 billion. The transaction is expected to close in the first quarter of 07. ICE’s management has indicated that it expects the proposed deal to be accretive within 12-18 months. The NYBOT acquisition offers ICE’s the commodities clearing operation, critical to ICE’s decision to acquire NYBOT.
• The move to electronic platforms by NYMEX & NYBOT markets will continue to drive upside to volume estimates and propel strong YoY growth. ICE’s market share of WTI is running at 30.3% in January, up from 29% in December. Since Nymex contracts began trading on GLOBEX in June, ICE’s market share has been hovering around 30.5%. The volume growth has been sufficient in the WTI market to benefit both exchanges while share has stayed the same.
• NYMEX futures volumes have dramatically accelerated since the introduction of side-byside electronic trading on the Globex platform. This has also benefited ICE as it has brought new participants into the energy markets (CME Globex traders), providing additional liquidity and new traders on the ICE platform.
• The exchange industry’s key growth catalysts have been reasons such as: high margin, high return business with secular drivers fueled by consolidation across the globe. Consolidation especially makes sense as there are potential Cost synergies from platforms and technology. Furthermore it allows the exchanges to pool liquidity, cross-market products and distribution capabilities.
• Out of all exchange stocks, my favorite two are ICE and NYX. I believe the market is finally realizing the upside potential in ICE’s volumes.

GS’s new 08 EPS of $5.50 is 43% above consensus and 10% above the next highest estimate. They believe the risk reward trade-off remains favorable on ICE with a 2:1 ratio of upside to downside based on our bull case 2008 EPS of $7.00 and our bear case EPS of $4.00.

BSC’s increased their year-end 07 price target to $150 from $120 per share. Although our new price target would give ICE a P/E multiple of 42.4X our 2007 estimate, we believe that our 2007 EPS estimate does not reflect the true earnings strength of ICE.

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