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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:
- ICE's Data Services Expanding Phenomenally: The demand for data-driven insights and analytics-driven recommendations has increased substantially in the last couple of years. The company's acquisitions in this regard have been able to expand the markets served by the company, add technology platforms and increase risk management, new data and valuation services. This has led to double the revenue contribution from data services in the current year. We expect them to continue growing over the next few years at around 7%. However, if this growth rate doubles due to increasing demand and adoptions, we could see 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. The volumes increased marginally in 2015 and 2016 saw over 10% growth due to increased volatility from continous shift in oil prices. Moreover, interest rate derivative volumes jumped due to the rate hikes in the end of 2015 and 2016. We expect them to continue growing over the next few years at around 3-4%. 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.
Over half 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).
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 43% 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.
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 7% of the value in the company.
Increasing demand for data services and products
Amid geopolitical turmoil and distressed market conditions, investors continue to seek data-driven advice and advanced technological products for better earning earning opportunities. With increased demand for data services and competitors like NASDAQ also cashing in on this demand, ICE's services catering to both equities and derivative will put it in a leading positions in future.
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.
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.
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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