Exchange sector underperforms broad market

Keefe, Bruyette & Woods' (KBW) first quarter 2014 wrap-up and trend analysis for U.S. exchanges indicated that double digit earnings-per-share (EPS) growth across U.S. exchanges was driven by stronger volume and acquisitions.  

EPS grew an average of 17%, mainly due to IntercontinentalExchange's (NYSE:ICE) acquisition of NYSE Euronext. ICE grew revenue 165% while EPS grew 27%—the most in Q1. ICE’s margin is expected to expand from 50% in Q1 to 58% by the end of 2015. Also growing from acquisitions is Nasdaq (NASDAQ:NDAQ), with a year-over-year  revenue up 27% and EPS growing 13%. Also reporting double-digit EPS growth in Q1 are the CME Group (NASDAQ:CME) (13%) and the Chicago Board Options Exchange (NASDAQ:CBOE) (15%) on increased volume in interest rates and index complexes.

However, the sector underperformed the S&P 500 by an average 3.6% since the end of the quarter. KBW attributes the loss to forward estimate revisions. Fiscal year 2014 EPS consensus estimates falling an average of 3.5% and FY15 estimates falling about 2.6%. An industry-wide volume malaise and low volatility since the end of the first quarter could be a reason for this underperformance.

Most exchanges reported relatively in-line quarters with consensus estimates, while CBOE was the only one to beat it for Q1 on an operating income basis. 

U.S. cash equity trading revenue in Q1 increased 12% year-over-year at ICE and 39% at NDAQ, driven by advantage growth (3% and 22% respectively) and a higher revenue capture share (7% year-over year at ICE and +12% at NDAQ). Except for the CME’s large rates complex and ICE’s smaller agriculture complex, futures volume in Q1 was negative. CBOE is using its market dominance of fee driven index options to keep pressure on its competitors.

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