Exchange sluggish 1Q performance expected to continue

Analysts for financial services specialist firm Keefe Bruyette & Woods expect the exchange space to continue underperforming vs. the financial sector in general in the second quarter after a weaker than expected first quarter.

KBW says that it lowered its already “below the street estimate” earnings per share (EPS) estimate for Intercontinental Exchange (ICE) and CME Group last week and is lowering estimate for GFI Group, Investment Technology Group (ITG), Nasdaq and NYSE Euronext based on lower than expected first quarter trading activity.

KBW did raise estimates for Marketaxess Holdings Inc. (MKTX) on strong volume in corporate bond trading and on Interactive Brokers Group (IBKR) due to favorable forex rate movement.

KBW expects the implementation of Dodd-Frank rules regarding over-the-counter derivatives clearing to be the major driver in the exchange space for months and years to come. However, they don’t expect exchange stock prices to reap the benefits of this until 2013 with the full impact not hitting until 2014.

  Market Rating Target Current Qtr. 2012E EPS 2013E EPS
Symbol Price To From To From To From To From To From
GFIG $3.53 Outperform Outperform $5 $5 $0.09 $0.11 $0.33 $0.35 $0.47 $0.47
IBKR $16.72 Market Perform Market Perform $18 $17 $0.35 $0.33 $1.34 $1.34 $1.55 $1.55
ITG $10.97 Market Perform Market Perform $12 $12 $0.15 $0.19 $0.66 $0.69 $0.93 $0.91
MKTX $36.62 Market Perform Market Perform $40 $40 $0.37 $0.35 $1.42 $1.42 $1.81 $1.81
NDAQ $25.35 Outperform Outperform $30 $30 $0.62 $0.65 $2.58 $2.70 $2.89 $3.09
NYX $28.00 Market Perform Market Perform $33 $34 $0.46 $0.49 $2.20 $2.26 $3.04 $3.15

Here is a recap of the report:


  • We view the next catalyst for our group to be the implementation of new rules around OTC derivative clearing and trading and see potential for earnings to rebase in 2013, though the full-year impact will not be until 2014. Stocks that could benefit include GFIG, BGCP, MKTX, ICE and CME.
  • Going into the 1Q12 earnings season, we recommend long NDAQ and GFIG. We see the potential for the initiation of a dividend this year as a catalyst for NDAQ stock, though volume remains muted. We recently upgraded GFIG on valuation, though we also believe natural gas volatility in 1Q12 could benefit its commodity brokerage revenue.
  • We maintain our Underperform rating on CBOE as we believe 1Q12 and forward consensus EPS could decline with less macro trading and a shift back to fundamentals that could negatively impact growth in its highest-fee index complex. In addition, the fee cuts in the multi-listed products could persist.
  • We include a scenario analysis on potential futures dividends for NDAQ and CBOE. We roll forward the rest of our valuation multiples to 2013 as we expect a growing number of investors to be buying on 2013 estimates rather than 2012 in the next few months.




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