ICE cut to neutral by Macquarie as NYSE deal lowers revenue

Price target reduced to $146

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Intercontinental Exchange Inc., which agreed to buy NYSE Euronext last month, was downgraded by Macquarie Group Ltd. as revenue growth slows and cost-cutting and integrating the two companies become a focus until 2014.

ICE was cut to neutral from outperform with its price target reduced to $146 per share from $166, Edward Ditmire, a New York-based analyst for the bank, wrote in a note to clients today. He said selling pressure on the shares may make the Atlanta-based company more attractive at lower prices.

“We’re intrigued, but think too early to invest in a ’14- ’15 story,” Ditmire said in the note. “Our prior thesis on ICE was about sector-leading growth, but going forward, an ICE/NYX combination will have more modest growth and heavy cost-cutting as the core of its story, and this won’t come into play until beyond the close” of the deal, which is expected in the second half of this year, he said.

Intercontinental, a 12-year-old energy and commodity futures exchange, agreed on Dec. 20 to acquire NYSE Euronext for cash and stock worth about $8 billion, moving to take control of the world’s biggest equities market. Merging the owner of the New York Stock Exchange with the second-largest U.S. futures market underscores the growing importance of derivatives and the diminishing influence of the 220-year-old NYSE.

The Big Board, once the benchmark for global free markets, has seen its share of trading in stocks listed on the exchange decline to 21 percent from 82 percent.

Regulatory Approval

Ditmire said events that could help the stock price include ICE’s fourth-quarter 2012 earnings report, expected on Feb. 6, and the deal receiving regulatory approval.

Intercontinental, which has gained 13.4 percent in the past year, rose 0.3 percent to $127.61 today in New York. NYSE Euronext has jumped 22 percent from a year ago, which includes a 34 percent rise on the day the acquisition was announced. It was little changed at $32.39 today.

Ditmire said he still expects Intercontinental’s main business of energy and commodity futures trading to expand. He forecasts operating income, which is revenue minus operating costs, at ICE will increase to $1.19 billion in 2015 from $938 million this year. Earlier this month, ICE reported record volume for 2012 after it converted energy swaps to futures contracts.

The company traded 847 million contracts last year, a 10 percent rise from 2011, after the change to energy swaps was made to avoid higher capital and margin charges mandated by the U.S. Dodd-Frank Act in October. Average daily volume at the company’s exchanges dropped 1 percent in the fourth quarter compared with the year-earlier period, it said in a Jan. 3 statement.

Bloomberg News

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