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05/22/17 10:00:06 AM



This week's Focus Stock of the Week is Intercontinental Exchange (ICE: $59), which carries CFRA's highest investment ranking of 5-STARS, or Strong Buy. We view ICE as one of the leading providers of market exchange and data trading products and services.

The company's primary products include futures contracts for Brent crude oil and West Texas Intermediate crude oil, OTC trading of Henry Hub natural gas contracts, and various soft commodity futures. ICE provides trading for financial settlement and contracts for physical delivery of the underlying commodity. In addition, the company provides clearing services for credit default swaps.

ICE acquired NYSE Euronext in November 2013 that expanded the company's presence in Europe for mostly financial derivative trading products. The company's strategy has also shifting to the faster growing area of financial data and data services that complements its market exchange services. In December 2015, ICE closed on the $5.2 billion acquisition of Interactive Data, one of the world's leading providers of financial data and data services.

Management believes the evolving landscape in the EU will offer ICE new business opportunities. One concern from ICE's perspective is Europe's MiFID II which it views as a poorly designed piece of legislation for the current environment and for the capital markets. ICE remains hopeful that as the billions of pounds and euros of compliance costs are considered relative to their benefit, European regulators will make adjustments so that new market-oriented solutions prevail.

We see mid- to upper-single digit organic growth in 2017, supported by higher trading volumes in commodities, a rising rate environment, and expanded non-trading products and services. In 2017, we see global derivatives, like interest rate and commodity trading products driving trading revenues, while cash equities are single-digit growers at best.

The Data and Listing segment revenues were 53.7% of total revenues in the 2017 first quarter. We target non-trading revenues in the 55% to 57% range by year end, with more growth ahead for data and analytics products. We believe that the outlook for market data will continue to grow due to automation, regulation and increased risk management.

In the first quarter, the company realized exchange data revenues that grew 7% over the prior year's first quarter. Management expects to see solid demand for its exchange data products and forecasts full year organic growth of between 4% and 5%. Organic revenue growth excludes the net impact of acquisitions and divestitures that significantly impact the current year on year -over-year comparisons.

Separately, the company's cash equity market trends remain challenging. ICE has a number of initiatives underway in the NYSE to enhance its position by diversifying its market models and to list more securities on the NYSE floor base markets.

Our EPS estimates are $3.07 for 2017 and $3.40 for 2018, reflecting improvements in expense control and reductions. Operating margins are expected to widen to 58% to 59% in 2017 from 57% in 2016, and operating cash flow supports a strong buyback plan that bought $1 billion in common shares in 2016.

Risks to our recommendation and target price include execution risk on the integration of IDC, greater-than-expected competition or weakening in the derivative markets, a significant decline in trading volumes, tighter regulatory guidelines that may limit trading, and a weak recovery in the global economy.

Our 12-month target price of $68 is based on applying a forward P/E of 22.1X to our 2017 earnings estimate, in line with direct peers and above the three-year historical average at 19.1X.

CFRA's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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