Intercontinental Exchange (NYSE: ICE) is scheduled to report its fiscal Q3 2021 results on Thursday, October 28. We expect Intercontinental Exchange to edge past the revenue estimates, while earnings will likely miss the expectations. The exchange reported strong results in the last quarter, with 22% y-o-y growth in the net revenues (total revenues minus transaction-based expenses) to $1.7 billion. It was primarily because of a 5x rise in mortgage technology revenues, partially offset by a 17% drop in the net revenue from cash equities and equity options. Further, its net income grew 137% y-o-y to $1.3 billion, driven by a one-time gain of $1.23 billion from the divestment of its stake in Coinbase, partially offset by higher operating expenses as a % of revenues. We expect the same trend to continue in the third quarter.
Our forecast indicates that Intercontinental Exchange’s valuation is $137 per share, which is 3% above the current market price of $133. Our interactive dashboard analysis on Intercontinental Exchange’s Earnings Preview has more details.
(1) Revenues expected to beat the consensus estimates
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Intercontinental Exchange’s revenues for full-year 2020 were $8.2 billion – 26% above the year-ago period. It translated into a 16% growth in net revenues of $6 billion. While the non-trading income grew 18% y-o-y to $3.6 billion in the year, the growth was offset by a 22% drop in the clearing & transaction net revenues.
- ICE generates close to 40% of the net revenues (55% of the total revenues) from clearing & transaction fees. The fee is directly dependent on the trading volumes, which were unusually high in 2020 due to the impact of the Covid-19 crisis. While this led to a 33% y-o-y growth in the total revenues from the segment, transaction-based expenses also increased 64%, resulting in an overall decrease of 22% y-o-y. Further, the net fee has reduced 7% y-o-y in the first half of 2021, mainly due to some drop in the trading volumes. We expect the same trend to continue in the third quarter.
- The non-trading income contributes around 60% of the net revenues. It posted an 18% y-o-y growth in 2020, mainly driven by a more than 300% jump in the mortgage technology segment. Further, the other sub-segments have also reported positive growth in the year. The same trend continued in the first and second quarters of 2021, with half-yearly non-trading revenues increasing by 40% y-o-y. We expect the growth momentum to continue in the third quarter.
- Overall, we expect Intercontinental Exchange’s total revenues to touch $9.1 billion for FY2021.
Trefis estimates Intercontinental Exchange’s fiscal Q3 2021 net revenues to be around $1.77 billion, marginally above the $1.75 billion consensus estimate. We expect the mortgage technology segment to drive the third-quarter results.
Moving forward, the non-trading revenues are likely to continue their positive growth in the subsequent quarters. Further, the clearing & transaction fee is likely to suffer in FY2021. Our dashboard on Intercontinental Exchange’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
Intercontinental Exchange Q3 2021 adjusted earnings per share (EPS) is expected to be $1.15 per Trefis analysis, almost 6% below the consensus estimate of $1.22. The exchange’s adjusted net income increased 8% y-o-y to $2.1 billion in 2020 mainly driven by higher revenues. Further, the revenue growth continued in the first and second quarters of 2021 – half-yearly net revenues are up 19% y-o-y. However, it translated into a 4% gain in the operating income due to higher operating expenses as a % of revenues. That said, the net income for the first six months of 2021 has improved 62% y-o-y to $1.9 billion due to the divestment of ICE’s stake in Coinbase in Q2. We expect the third-quarter results to follow the same momentum.
Going forward, we expect Intercontinental Exchange’s net income margin to decline from 25.3% to 18.7% in FY2021. It will likely result in a GAAP EPS of $3.11.
(3) Stock price estimate 3% higher than the current market price
We arrive at Intercontinental Exchange’s valuation, using an EPS estimate of around $3.11 and a P/E multiple of close to 44x in fiscal 2021. This translates into a price of $137, which is 3% above the current market price of around $133.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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