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Investment Overview for IntercontinentalExchange (NYSE:ICE)
Below are some key drivers of ICE's value that present opportunities for upside or downside to the current Trefis price estimate:
- European Derivative volume:
IntercontinentalExchange closed the acquisition of NYSE Euronext in November 2013. The acquisition added LIFFE, now ICE Futures Europe, a lucrative European derivatives business, to its portfolio. The business is expected to grow rapidly over the next few years due to regulations such as the Dodd-Frank Act in the U.S. and EMIR (European Market Infrastructure Regulation) in the E.U. We currently forecast annual European derivative volumes to reach 1.6 billion by the end of 2020, up from 955 million at the end of 2012. However, if the company's newfound scale allows it to take an even bigger share of the market and volumes reach 2 billion, there could be a 5% upside to our price estimate.
- ICE's Derivatives Contracts Traded:
ICE has a large derivatives portfolio of its own. It is one of the largest energy futures exchanges in the world, and also offers derivatives on agricultural commodities, metals and credit default swaps, among others. The total volume of these derivatives has been growing rapidly in last few years - it increased by 21% and 10% in 2011 and 2012 respectively. Although that growth halted in 2013 due to low volatility in North American natural gas futures, its largest segment, it bounced back in 2014 with 45% increase in total contract volumes. We expect them to continue growing over the next few years, after slowing down a little in 2015. However, if this growth does not materialize and volumes remain stagnant, we could see a 5% downside to our price estimate.
Established in May 2000, IntercontinentalExchange is one of the largest exchange operators and clearing houses in the world. Focused on growth, it has followed an aggressive acquisition strategy throughout its short history and recently purchased NYSE Euronext, its largest acquisition ever.
ICE acquired Interactive Data and Trayport in December 2015. Interactive Data is a provider of financial market data, analytics and related trading solutions, serving the mutual fund, bank, asset management, hedge fund, securities and financial instrument processing and administration sectors. Trayport is a software company that licenses its technology to serve exchanges, OTC brokers and traders to facilitate electronic and hybrid trade execution primary in the energy markets. These acquistions are aimed at boosting ICE's data service revenues.
After buying NYSE, ICE had a business portfolio that includes cash trading, listings, derivatives and data services businesses in the U.S. as well as Europe. However, the company exited its European cash and listings businesses in June 2014 through an IPO.
The derivatives business is the largest and fastest-growing division within the firm. It is also one of the most profitable segments, having EBITDA margins of around 50% according to our estimates. The division is likely to continue growing over the next few years as regulations around the world force over-the-counter (OTC) derivatives onto centralized clearing platforms similar to those operated by ICE.
Around one-third of the value in ICE's stock currently comes from its market data and technology business. This division sells market data to market participants, along with other services such as terminal access, direct access services, daily indexes and end of day reports. The revenue from this division has been growing recently due to an increase in the number of users and an increase in pricing, along with acquisitions undertaken (Intereactive Data & Trayport).
Equity Trading and Listings
The acquisition of NYSE also provided ICE the ownership of cash equities, equity options and listings franchises in the U.S. Collectively, these businesses account for just 14% of the value in the company.
Regulations to drive European derivative volumes
The financial crisis of 2008-2009 showed the need for increased transparency in the derivatives market. Due to this, the G-20 nations resolved in 2009 that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.”
Since then, regulations such as the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation (EMIR) across the Atlantic have been forcing OTC derivatives to move to centralized clearing systems. According to the Bank for International Settlements (BIS), the $633 trillion notional amount outstanding in the global OTC derivatives market will eventually shrink by roughly 46% due to these regulatory mandates.
With these new regulations comes a big opportunity for derivatives exchanges around the globe. In particular, the European derivatives segment accounts for over 44% of the total outstanding volume according to some estimates, making this is a particularly attractive market.
Intense competition among exchanges
Given the huge opportunity in Europe, almost all the major U.S. exchanges are trying to boost their presence across the Atlantic. NASDAQ has already launched a futures exchange in London, while CME is in the process of doing so. Both the exchanges are likely to compete aggressively with ICE in the future in order to gain market share. The intense competition could also lead to price wars among these players and negatively impact profit margins.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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