A Look At NYSE Euronext’s $39 Valuation

by Trefis Team
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    Quick Take 

  • NYSE Euronext’s derivatives division is fueling revenue growth for the firm as derivatives trading volumes face regulatory tailwinds.
  • The company’s Liffe business is ideally placed to benefit from the trend towards centralized clearing of OTC derivatives in Europe.
  • IntercontinentalExchange’s acquisition of NYSE Euronext should further increase Liffe’s capabilities in the derivatives marketplace.
  • The company also remains focused on reduced expenses and capital expenditures. This is net positive for the firm’s valuation.

NYSE Euronext (NYSE:NYX) continues to register revenue and net income growth even though its cash equity trading business is languishing. This growth comes primarily from the company’s derivatives trading business that is benefiting from higher volatility and regulatory tailwinds. Going forward, the company is also likely to benefit from the steps it has taken to (1) increase revenue in non-transaction based businesses, (2) reduce expenses and (3) increase shareholder returns.

We believe that as these initiatives are additive to the value of the company. We are modifying our price estimate for the exchange operator to around $39 accordingly. In the following sections we discuss the major factors that are driving the company’s valuation upwards.

See our full analysis for NYSE Euronext

European Derivatives Trading Volumes

The global derivatives marketplace is undergoing a major change as regulations around the globe are forcing the over the counter (OTC) segment to embrace centralized clearing in order to reduce the risk in the system. The changes are most notable in Britain, where the majority of OTC trading takes place and NYSE’s Liffe business is likely to be one of the biggest beneficiaries of this trend. ((The Impact Of Regulation On The Structure Of European OTC Markets, Deloitte, 2012))

What is NYSE Liffe?

Liffe is the exchange operator’s international derivatives business which operates derivative markets in Amsterdam, Brussels, Lisbon, London and Paris. Along with offering access to a range of interest-rate, equity, index, commodity and currency derivative products; the business bridges the listed and OTC markets through its Bclear and Cscreen services. [1]

Why we are optimistic about Liffe’s future?

OTC Interest rate contracts are a $494 trillion market and are the largest segment within the overall OTC derivatives market, according to the Bank of International Settlements. [2] As the European Market Infrastructure Regulation (EMIR) in the EU and the Dodd-Frank Act in the U.S. push these products towards centralized clearing, all exchange operators are bracing for increased trading volumes and fighting for a larger piece of the pie.

However, while other players are just entering the market, Liffe is already one of the two market leaders in the European exchange-traded interest rate derivatives marketplace. This makes the company ideally positioned to benefit from the regulatory tailwinds as described above.

Liffe’s leadership in the European derivatives market is further likely to solidify once NYSE Euronext is acquired by IntercontinentalExchange (ICE). ICE has an established multi-asset derivatives clearing house in London and will provide Liffe the capability to introduce new products in other segments. You can read more about the fallout from this acquisition in our previous article on Why does ICE want to takeover NYSE and in a Wall Street Journal article here.

Improving Profit Margins

NYSE Euronext operates on a fairly fixed cost base – that is, the majority of the firm’s expenses are fixed in nature and do not vary significantly with trading volume. This means that any improvement in transaction based revenue in the future will contribute to the bottom-line significantly and help improve profit margins.

Additionally, the company has also focused on increasing efficiency across businesses in the past few quarters and is likely to benefit from its efforts. In 2012, NYSE announced a cost cutting initiative called “Project 14” that aims to reduce expenses by $250 million annually by 2014. The company had already accomplished 59% of this goal by Q1 2013, well ahead of schedule. [3]

Curtailed Capital Expenditure

In addition to reducing expenses, the company has also drastically cut down on capital expenditures. According to the firm’s guidance, its capital expenditures for this year will be only $150 million compared to $191 million last year. This leaves the firm with more free cash flows and affects its valuation positively.

Market Data Revenue Could Add To Growth

NYSE Euronext’s market data revenue has remained low in the recent past due to aggressive cost cutting at customer firms. However, the company has been renegotiating its global market data agreements to implement higher pricing. Going forward, we expect the revenue from this division to increase as these agreements take effect.

Share Buybacks To Boost Shareholder Return

Lastly, the company has been utilizing its extra cash for buying back common shares. The reduction in the company’s share count reduces the claims on the company’s future earnings and increases the value of each remaining share.

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Why Does ICE Want To Takeover NYSE?

Notes:
  1. SEC Filings, NYSE Euronext, 2012 []
  2. Amounts outstanding of over-the-counter (OTC) derivatives, BIS, March 2013 []
  3. Press Release, NYSE Euornext, April 30, 2013 []
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