Intercontinental Exchange’s stock (NYSE: ICE) has gained approximately 11% YTD, as compared to the 14% rise in the S&P500 over the same period. Further, at the current price of $114 per share, ICE stock is trading 15% below its fair value of $133 – Trefis’ estimate for Intercontinental Exchange’s valuation.
Interestingly, ICE stock had a Sharpe Ratio of 0.5 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
The company posted mixed results in the second quarter of 2023, with earnings beating the estimates but revenues missing the mark. It reported net revenues (revenue minus transaction-based expenses) of $1.9 billion – up 4% y-o-y. The growth was mainly driven by a 9% increase in the exchange net revenues and a 7% rise in the fixed income and data services segment, partially offset by a 16% decrease in the mortgage technology category. Notably, the exchange revenues were up due to a 25% drop in the transaction-based expenses for the quarter, more than offsetting the 6% decline in transaction & clearing income. On the cost front, the operating expenses as a % of revenues witnessed a favorable drop. This coupled with lower total other expenses, led to a 44% improvement in the adjusted net income to $799 million.
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The net revenues grew 2% y-o-y to $3.78 billion in the first half of FY2023. It was because of a 5% increase in the exchange net revenues and a 9% growth in fixed income & data services unit, partially offset by a 20% fall in the mortgage technology income. Markedly, the exchange revenues contribute close to 60% of the top line. Altogether, the adjusted net income increased 20% y-o-y to $1.45 billion.
Moving forward, we expect the same trend to continue in the third quarter. All in all, Intercontinental Exchange revenues (total revenues) are estimated to touch $9.7 billion in FY2023, translating into net revenues of around $7.6 billion. Additionally, ICE’s adjusted net income margin is likely to improve in the year, leading to an adjusted net income of $3.15 billion and an annual EPS of $5.71. This coupled with a P/E multiple of just above 23x will lead to a valuation of $133.
|S&P 500 Return||-5%||14%||95%|
|Trefis Multi-Strategy Portfolio||-9%||17%||276%|
 Month-to-date and year-to-date as of 8/18/2023
 Cumulative total returns since the end of 2016