Recently, we initiated coverage on Nasdaq OMX Group Inc. (NDAQ) with a Neutral recommendation. The company’s fourth quarter earnings surpassed the Zacks Consensus Estimate by a couple of cents on low charges and efficient expense management. However, the top-line declined on weak volumes. Despite the weakness experienced in equity trading in recent years, Nasdaq’s options business continues to reflect strong performance.
Besides, the company’s organic growth is helped by the increase in market technology and access services revenues primarily due to the increased deliveries of contracts and changes in the exchange rates of various currencies compared to the U.S. dollar. Additionally, the company’s net derivatives trading and clearing exchange platform continue to perform on a strong base. Going forward, these revenue drivers have the potency to generate growth.
Further, Nasdaq generates a healthy balance sheet along with a strong cash flow of its diverse business model. Recently, this strength provided an opportunity to refinance the company’s outstanding credit facility on extremely favorable terms.
Additionally, in Jan 2010, S&P’s ratings services upgraded the long-term counterparty credit rating on Nasdaq to “BBB” from “BBB-“, expecting the company to generate good earnings and operating cash flows in 2010. The rating agency also raised its debt rating on Nasdaq’s new debt to “BBB” from “BB+”, reflecting a sound financial outlook and improvement in operating efficiencies.
However, Nasdaq’s top-line growth has been marred by a decline in market and issuer services exchange revenues that plummeted on a lower average net fee per share, decreasing trading activity and market competition.
Besides, the global economic crisis experienced in the last couple of years has also led to a decline in initial public offerings (IPOs) that directly impacts new listings, trading volumes and related revenues. We do not expect any random growth in the top-line unless the current market recovery provides resonance to liquidity and credit quality.
Moreover, Nasdaq’s rival trading platforms launched in recent years have snipped off the market share held by the long-standing exchange operator. The recent addition in market players has pressured fees generated from handling trades and volumes.
The company’s matched market share executed in Nasdaq-listed securities declined from 46% in 2007 to 33% in 2009, while the combined matched market share in all U.S.-listed securities declined from 29% in 2007 to 23% in 2009. This steady erosion substantially and directly increases the operational and financial risk of the company in the upcoming years.
The outstanding technical performance and rating upgrade has enabled the company to enter new markets on a low cost and highly flexible platform, offering value addition to its clients and creating additional sales opportunities. However, the ongoing low M&A activity and headwinds related to volume and pricing continue to limit the stock’s upside. We believe that Nasdaq’s operations will gain momentum once the global economy stabilizes and rebounds to its historical highs.
On Monday, the shares of Nasdaq closed at $18.80, up 0.9%, on the New York Stock Exchange.
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