With 17 consecutive years of record revenues, operating income, and adjusted EPS, expect consistent growth from Intercontinental Exchange (ICE).
When I last reviewed ICE, it had just released Q2 and YTD2022 results. I now revisit it given the February 2, 2023 release of Q4 and FY2022 results and 2023 guidance.
Part 1 of ICE's FY2022 Form 10-K has a comprehensive overview of the company and various risk factors.
In FY2006, ICE's annual revenue was just under $0.314B. Through multiple strategic acquisitions which include the acquisition of the New York Stock Exchange in November 2013 and Ellie Mae in September 2020, ICE's annual revenue has grown to $9.636B in FY2022.
Not only has ICE reported impressive top-line growth during the FY2006 - FY2022 timeframe, but we see a consistent track record of adjusted diluted EPS growth.
Black Knight (BKI) Acquisition
In my May 6, 2022 post, I provided a brief overview of the proposed Black Knight, Inc. (BKI) acquisition.
The FTC continues to review the proposed acquisition and ICE continues to cooperate with the FTC in an effort to obtain regulatory approval. ICE remains optimistic the transaction will close in the second half of 2023.
In conjunction with the announcement of the proposed BKI acquisition, ICE issued new Senior Notes to aid in the funding of the acquisition. Note 10 in ICE's FY2022 Form 10-K commencing on page 117 explains the reason for the surge in ICE's long-term debt from $12.4B at FYE2021 to $18.1B at FYE2022.
Of the $8B ICE raised by way of new fixed-rate Senior Notes on May 23, 2022, $3.0B of the net proceeds were used to redeem the notes maturing in 2022 and 2023 and amounts outstanding under ICE's Commercial Paper Program. The ~$4.9B earmarked to fund a portion of the BKI acquisition sits in 'short-term restricted cash and cash equivalents' on ICE's FYE2022 Balance Sheet.
The comments under 'New Senior Notes' within Note 10 explain what happens if the BKI acquisition is not consummated on or before May 4, 2023, subject to two automatic extensions of three months each, to August 4 and to November 4, 2023.
Q4 and FY2022 Results
Material related to the February 2, 2023 Earnings Release is accessible here.
ICE experienced weakness in Q4 with the decrease in bottom-line and top-line largely attributed to ICE's energy futures revenue and its mortgage technology business. The weaker results in the mortgage technology segment come as no surprise given the lower industrywide mortgage origination volume. However, on a full-year basis, the Exchanges and Fixed income and data services segments reported top-line revenue growth (see page 90 in the FY2022 Form 10-K).
ICE reported $1.808B of income before income tax expenses in FY2022 versus $5.698B in FY2021. This variance is attributed to other income/expenses that are unrelated to ICE's normal business operations. The variance is explained starting on page 75 in the FY2022 Form 10-K.
ICE's FY2022 results pale in comparison to FY2021's results on a GAAP basis; it reported $2.58 of diluted EPS in FY2022 versus $7.18 in FY2021. When we exclude items that are not part of ICE's normal business operations, however, we have $5.30 of adjusted diluted EPS in FY2022 versus $5.06 in FY2021.
The following 2 tables reflect a steady improvement in ICE's adjusted EPS results.
ICE has a mix of transaction and compounding subscription revenues; the recurring subscription revenue provides upside exposure while hedging ICE's downside risk.
In FY2022, ICE's revenue mix was ~51% recurring and ~49% transaction-based versus ~34% recurring and ~66% transaction-based in FY2014. These recurring revenues include data services, listings and various mortgage technology solutions.
Recurring revenues are expected to continue to be led by ICE's Mortgage Technology segment given the expansion in the adoption of automation across the mortgage workflow.
Free Cash Flow
ICE's FCF in FY2013 - FY2022 (in billions) is $0.556, $1.264, $1.034, $1.784, $1.728, $2.253, $2.354, $2.471, $2.671, and $2.906.
ICE's FY2023 guidance is as follows:
Details of ICE's debt commence on page 117 in the FY2022 Form 10-K.
ICE's current senior unsecured long-term debt credit ratings and outlook remain unchanged from the time of my prior review.
- Moody's: A3 (stable and affirmed on May 5, 2022)
- S&P Global: A- (stable and last reviewed on May 9, 2022)
Both ratings are at the bottom of the upper-medium grade investment-grade category. These ratings define ICE as having a strong capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
ICE's ratings are acceptable for my purposes.
Dividend and Dividend Yield
ICE's dividend history is accessible on the NASDAQ website; ICE does not maintain its dividend history on its website.
In FY2020 - FY2022, ICE distributed dividends of $669, $747, and $853 (in millions).
When I published my August 4, 2022 post, shares were trading at ~$107.44. The 3rd consecutive $0.38/share quarterly dividend payable on September 30 to stockholders of record as of September 16 resulted in a ~1.4% dividend yield.
On February 2, 2023, ICE announced a ~10.5% increase in its quarterly dividend from $0.38/share to $0.42/share commencing with the dividend payable at the end of March 2023. This increase extends ICE's 10-year track record of double-digit dividend growth.
Using the current ~$108 share price, the new dividend yield is ~1.55%.
The low dividend yield will likely dissuade some investors from investing in ICE. However, the focus should not be on dividend metrics but rather on the total potential return.
ICE's weighted average diluted shares outstanding in FY2012 - FY2022 (in millions) are 365, 396, 573, 559, 599, 594, 579, 565, 555, 565, and 561.
In FY2022, ICE repurchased ~5 million shares totalling $0.632B. Details of ICE's Stock Repurchase Program are found in the FY2022 Form 10-K commencing on page 124.
In connection with the pending BKI acquisition, ICE suspended its share repurchases on May 4, 2022 until its leverage falls below 3.25x. This is anticipated to occur toward the end of 2024.
ICE's diluted PE in FY2011 - FY2022 is 18.52, 16.46, 29.52, 66.86, 24.11, 23.09, 25.66, 17.00, 25.15, 31.76, 25.23, and 37.52.
I reference my August 4, 2022 post in which I look at ICE's valuation using adjusted diluted EPS estimates at the time I wrote previous ICE posts.
Using the current ~$108 share price and FY2022 adjusted diluted EPS of $5.30, we get a trailing adjusted diluted PE of ~20.4.
Based on broker guidance that is likely to be amended over the coming days, the valuation is:
- FY2023 - 15 brokers - mean of $5.53 and low/high of $5.12 - $6.02. Using the mean estimate, the forward adjusted diluted PE is ~19.5.
- FY2024 - 14 brokers - mean of $6.07 and low/high of $5.44 - $7.02. Using the mean estimate, the forward adjusted diluted PE is ~17.8.
- FY2025 - 6 brokers - mean of $6.43 and low/high of $5.75 - $6.75. Using the mean estimate, the forward adjusted diluted PE is ~16.8.
I disregard the FY2025 estimates since estimates are from only 6 brokers.
ICE's impressive track record of 17 consecutive years of record revenues, record operating income, and record adjusted EPS has been made possible because it diversified across asset classes and geographies. This means ICE is not restricted to any one cyclical trend or macroeconomic environment.
ICE's valuation is appealing. However, I am reluctant to add to existing positions because it appears a degree of irrational exuberance has returned to the broad market. Furthermore, many companies have communicated on earnings calls that 2023 is likely to be a challenging year. While I can not predict short-term share price behaviour, I suspect there is a very good probability that we will experience a broad market correction before mid-2023. Should this occur, I would consider adding to my ICE exposure but this will be dependent on what other opportunities are presented.
For the sake of full disclosure, I currently hold 400 ICE shares in the FFJ Portfolio and more shares in a retirement account. In my recent January 2023 Investment Holdings Review, ICE was not a top 30 holding.
I wish you much success on your journey to financial freedom!
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Disclosure: I am long ICE.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.