Is Intercontinental Exchange Stock Fairly Priced?

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Trefis
ICE: Intercontinental Exchange logo
ICE
Intercontinental Exchange

Intercontinental Exchange’s stock (NYSE: ICE) has lost approximately 30% YTD, as compared to the 19% drop in the S&P500 over the same period. Further, at the current price of $95 per share, ICE stock is trading 23% below its fair value of $123 – Trefis’ estimate for Intercontinental Exchange’s valuationThe company outperformed the street expectations in the second quarter of 2022, with net revenues (revenue minus transaction-based expenses) increasing 6% y-o-y to $1.8 billion. The exchange-based revenues increased 11% y-o-y, primarily driven by a 25% rise in the transaction and clearing fees. It was mainly due to higher contract volume in cash equities & equity options and financial futures & options categories. Further, the fixed income and data services segment grew 12% y-o-y. On the flip side, the growth was partially offset by a 13% decrease in the mortgage technology unit. In addition to this, the profitability suffered due to a decrease in other income, net from $1.13 billion to -$130 million. It resulted in a 56% y-o-y drop in the adjusted net income to $555 million in the quarter.

The net revenues improved 6% y-o-y to $3.7 billion in the first half of 2022. It was driven by growth in the exchange segment and fixed income & data services unit, while the mortgage technology witnessed negative growth. However, the adjusted net income was reduced by 36% y-o-y to $1.2 billion because of a significant drop in the other income, net, which eroded all the positive effects of an increase in the top line.

The firm recently released its third quarter statistics, with total average daily volume (ADV) increasing by 6% y-o-y. We expect the exchange-driven revenues to see positive growth in Q3. Further, the fixed income and data services division is likely to maintain its growth trajectory. Notably, consensus estimates of Q3 net revenues and earnings are $1.8 billion and $1.27 respectively. Altogether, Intercontinental Exchange revenues (total revenues) are estimated to remain around $9.6 billion in FY2022. Additionally, ICE’s adjusted net income margin is likely to decrease from around 44% to 30% in the year, leading to an adjusted net income of $2.9 billion and an annual GAAP EPS of $5.28. This coupled with a P/E multiple of just above 23x will lead to a valuation of $123.

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 Returns Oct 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 ICE Return 5% -30% 69%
 S&P 500 Return 8% -19% 72%
 Trefis Multi-Strategy Portfolio 6% -22% 209%

[1] Month-to-date and year-to-date as of 10/26/2022
[2] Cumulative total returns since the end of 2016

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