NYSE Initiated as Neutral – Analyst Blog

Recently, we have initiated coverage on NYSE Euronext Inc. (NYX) with a Neutral recommendation. The company’s fourth quarter operating earnings per share of 58 cents came in substantially ahead of the Zacks Consensus Estimate of 48 cents, reflecting an increased momentum in the business model, continuing benefit of the various cost reduction programs and successful integration of the NYFIX acquisition. However, the top line declined on weak volumes.

 

NYSE continues to drive its operating leverage and margin expansion through strong expense management, headcount reduction and lower taxes. These reflect increased momentum in its business model.

 

The expense control in 2009 was achieved despite the addition of several new businesses including the former Amex businesses, NYSE Liffe Clearing and NYFIX, along with the structured costs related to these acquisitions. Going ahead in 2010, the company is expected to realize the full-year benefit from cost reduction programs launched in 2009 driving margins upside.

 

NYSE continues to take significant strides in diversifying revenue streams and creating a world class diversified multi-asset global exchange group. The company’s U.S. derivatives net trading gained momentum driven by the addition of the former Amex options business in Oct 2008 and the increase in matched market share since the third quarter of 2009.

 

In Europe, NYSE is the second largest cash market based on average daily trades and average daily turnover, reflecting an increased internationalization of client base. Going ahead, the amendments made to annual fee calculations in Europe will substantially increase the annual fees to the exchange, which will provide strong support to the top line.

 

NYSE continues to grow inorganically as well through acquisitions and alliances. With the addition of NYFIX Marketplace, the company has successfully expanded its customer base, the pre-trade product offering and global buy-side and sell-side trading communities.

 

During the fourth quarter of 2009, leading global banks and liquidity providers made an equity investment in NYSE Liffe U.S., thereby enhancing its market and capital position. Further, after the success of implementing semi-mutualization on NYSE’s U.S. futures platform, the company plans to implement this policy on the NYSE Amex options business. Besides, in the third quarter of 2010, NYSE Liffe U.S. plans to launch fixed income derivatives’ trading platform that will further enhance the company s future and options businesses.

 

However, NYSE’s top-line growth has been marred by decline in market data and cash trading revenues that plummeted on lower listing fees, foreign currency fluctuations, decreasing trading activity and market competition. Further, the global economic crisis experienced in the last couple of years has also led to a decline in the size of securities offerings, 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, NYSE’s rival trading platforms launched over the recent years have trimmed the market share held by the second largest exchange operator. The recent addition in market players have pressured transactions and market data fees generated from handling trades and volumes. As a result, the company’s share of trading on a matched basis in NYSE-listed securities has declined from approximately 45.6% in 2008 to 38.4% in 2009. This steady erosion will substantially and directly increase the operational and financial risk of the company in the upcoming years.

 

Overall, the outstanding technical performance and a diverse business model has enabled NYSE to enter new markets on a low cost and highly flexible platform, offering value addition to its clients and creating additional sales opportunities. However, increased competition, product pricing and government regulations continue to pose risk on the market share and the operating leverage of the company. We believe that NYSE’s operations will gain momentum once the global economy stabilizes and rebounds to its historical highs.