| BULL CASE | BEAR CASE | ||
|---|---|---|---|
| Company is expanding international reach | Valuations steep | ||
| Real-time stock price data plan could bring in significant revenue | Acquisition moves too aggressive | ||
| Looking to diversify into other products, including derivatives | -- | ||
| Strong EPS and revenue growth | -- | ||
NYSE
Group Inc. is a perfect candidate for a Bull vs. Bear column. The
company made an announcement this week that is in some ways a positive,
but in the bigger picture is negative for the company.
NYX operates securities market centers the New York Stock Exchange and NYSE Arca securities. NYSE is a liquid equities market, where customers could choose between the floor-based auction markets and electronic trading. The company also provides market-information products and services.
The company said this week that going forward, it plans to continue to "lead the global transformation of the exchange landscape," in addition to implementing Hybrid Market electronic tools.
NYX officials said Wednesday that the company signed a letter of intent to form a strategic alliance with the Tokyo Stock Exchange, which becomes a public company in 2009. The move will help the exchange to get an international foothold on the exchange and equity space.
The entities are now set on a course to jointly develop and explore new opportunities in trading systems and technology, investor and issuer services, investment products, and governance and regulation. This is all good.
Here comes the negative part. The agreement, which is non-exclusive, also sets the stage for a potential capital alliance between NYX and the Tokyo exchange. The problem is that this announcement follows a stream of other moves by the company to form global ties, and even though overall financial performance looks good, an aggressive acquisition strategy remains a headline risk.
NYX's M&A Mania
This winter, the company said it plans to close an acquisition of Euronext NV and create the first trans-Atlantic stock exchange. Earlier this month, NYX, investment banker Goldman Sachs, private equity firm General Atlantic, and Japan's Softbank Asian Infrastructure Fund signed an agreement to collectively buy a 20% stake in India's National Stock Exchange, further weaving together the world of equity trade. NYX said it will pay $115 million for its 5% stake.
All this follows a merger with former electronic rival Archipelago Holdings. The results of operations of Archipelago have been included in NYX's results of operations since March 8, 2006. The move ended NYX's 213-year history as a private club basically owned by only 1,366 seat holders. It also started NYX thinking about using its broad electronic reach to offer other products such as derivative contracts.
Shares in NYX headed a bit lower Friday after the company reported fourth quarter earnings of $0.45 per share, excluding non-recurring items such as costs related to a merger with Archipelago, $0.01 worse than consensus.
Revenues rose 12.3% year over year to $477.7 mln excluding activity assessment fees, versus the $461.2 mln consensus. The increase in fees came as for the three months ended Dec. 31, 2006, compared to the same period a year ago, NYSE Group recorded increased average daily volumes across all categories of securities, including handled volume increases of 4.7% in NYSE-listed issues, 13.8% in NYSE Arca and Amex-listed issues, 24.6% in Nasdaq-listed issues, 27.3% in ETFs, and 29.1% in equity options contracts.
Expenses were higher than expected in several areas though, including marketing costs, which were up around 30% from the same period last year.
The outlook for NYX's earnings per share growth to 2007 from 2006 is upwards of 47%. That trumps all of the other exchanges in the space, including the Chicago Mercantile Exchange Holdings Inc. at about 26%. The reason is that it's anticipated that international trading will garner higher transaction fees.
NYX is also tapping into a revenue stream that has proven to be very profitable for exchanges. NYX plans to later this year bring real-time stock-price data to millions of Internet users. The company will sell data Web sites for $100,000 a month, giving them the ability to publish trade prices on the New York Stock Exchange with virtually no delay. NYX already pulled in $5.6 million in the latest quarter due to market data distribution through other means.Valuations Lofty
NYX's valuations though are a looking a little too lofty. Looking at EV/EBITDA (earnings before interest, taxes, depreciation and amortization divided by enterprise value) NYX is at 23.1x. That's high, considering competitor NDAQ is at about 13.7x.
EV/EBITDA is an important measure here when trying to compare the valuation of NYX with its closest competitors, considering that for the three months ended Sept. 30, 2006, compared to the three months ended Sept. 30, 2005, depreciation and amortization increased $12.9 mln, or 86.6% at NYX. The operations of NYSE Arca represented $9.2 mln of the increase following the March 7, 2006 merger with Archipelago. The remaining $3.7 mln increase was associated with capital expenditures on technology and infrastructure.
NYX's price-to-book ratio of 9.8x is also at a premium to NDAQ at 2.9x. Of concern too is that NYX has gone increasingly into the red with its cash flow with investing activity. At about a loss of $222 mln in 2005, the loss was almost double where it was in 2001.
So while a comparison of bullish to bearish factors seems to indicate more bullish indicators than bearish, the fact is that the negatives in this situation carry more weight than the positives. We therefore, recommend that investors stay away from NYX shares until valuations and acquisition spending come back to more realistic levels. Certainly we are not alone with our bearish view on the stock, as about 17% of stock is currently sold short.
(Disclosure: Briefing.com has a business relationship with NDAQ)
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