Despite A Dip In Earnings NYSE Looks Set For $34

NYSE Euronext (NYSE:NYX) observed a 19% drop in net income for the second quarter of 2012 as macro-economic conditions in the U.S. and Europe took a toll on the company’s earnings. ^[1] Total net income was reported at $125 million. Adjusting for merger expenses and exit costs, net income was $128 million. Total revenues fell 9% to $602 million. Despite the fall in income, NYSE’s fundamental operations remain strong. We discuss below a few key metrics which influence our $34 valuation of NYSE Euronext’s stock.

See our full analysis of the NYSE Euronext stock here

Global Derivatives Get A Push From The Fed

The average daily volume (ADV) for derivatives trade worldwide fell 8% from the second quarter of 2011, reaching 8.6 million contracts. Although a significant decrease, the figure represents a 14% increase from the trading volume in the first quarter of 2012. The NYSE has taken several initiatives to help trade, including the offering of futures on the Depository Trust & Clearing Corporation (DTCC) general collateral finance Repo Index maintained. This product has been quite popular among investors, trading 19,959 contracts valued around $100 billion in the first week.

Volumes will be further boosted by the U.S. Treasury Department’s announcement to launch floating rate securities.  ((US Treasury move to put ‘wind in NYSE sails’ , Financial News, 8^th August, 2012)) The DTCC index uses securities issued by the U.S. government-backed agencies to track daily average interest and is widely tipped to be the replacement for Libor, following the scandal involving the rate.  ((Nearly 20,000 Futures on DTCC GCF Repo Index in First Week, NYSE Euronext))

We maintain a positive outlook for derivative trading, which accounts for 41% of NYSE’s stock value, according to our analysis.

Positive Signs For Cash Trading

The ADV for European cash products increased 11% year-on-year to 1.7 million transactions. This increase was influenced, in part, by news regarding the Spanish bailout and pro-austerity results in the Greek elections.  The NYSE has set up a regulated exchange, NYSE Euronext London, having failed in its efforts to acquire London Metal Exchange.  The company accounted for 69% of the market share in June, a near monopoly that it will look to build on in the future.

Trading volume for the U.S. fell 12% over the last year to 1.8 billion shares per day. This figure will be boosted by the launch Retail Liquidity Program (RLP). The platform will allow trading firms to participate in retail trades outside the traditional marketplace. (See NYSE Is Worth $34 With Alternative Retail Equity Market Rollout) Private trading outside the traditional exchanges has increased from 15% to 35% of total volume since the economic crisis began in 2008 and provides a huge potential base for NYSE to capitalize on.

Revenues for the technology division were reported at $119 million, in-line with the prior year. We expect a steady increase in these revenues as NYSE comes up with new innovations and developments. The exchange recently unveiled plans for expansion of its Capital Markets Community Platform in Europe. The platform uses a cloud network to reduce trading friction and provides users access to real-time market data.

The NYSE has also unveiled plans to stream data on trades from its exchanges through television broadcasters. ^[2]

Our price estimate for NYSE Euronext’s stock is $34, approximately 35% above the current market price. You can gauge the effect of a change in the forecasts by modifying the interactive charts above.

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1. NYSE Euronext Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 3^rd August, 2012 [↩]
2. NYSE jumps into broadcast-data game, MarketWatch, 30^th July, 2012 [↩]