Intercontinental Exchange - Growth At A Fair Valuation

In my opinion, Intercontinental Exchange (ICE) currently offers growth at a fair valuation.

I last analyzed ICE in my May 6, 2022 post,  at which time I provided a brief overview of the company and the proposed acquisition of Black Knight, Inc. (BKI). This $13.1B cash and stock transaction ($85/share which is in line with BKI's 52-week high in 2021) is expected to close in the first half of FY2023.

The May 5, 2022 Black Knight acquisition presentation explains the strategic rationale for bringing BKI into the ICE fold.

I like ICE's long-term outlook and based on my analysis I acquired another 100 shares on May 5, 2022 in a 'Side' account within the FFJ Portfolio at ~$102.70/share.

On May 9, 2022, I added to my existing exposure in a retirement account @ ~$99.925/share.

ICE has now released Q2 and YTD 2022 results and FY2022 guidance. With shares currently trading at ~$107.44, I revisit ICE to determine if shares continue to be reasonably valued.

Business Overview

I recommend you read Part 1 of ICE's FY2021 Form 10-K if you are unfamiliar with the company. This section contains a comprehensive overview of the company's history, business strategy, competitive landscape, risk factors, and more.

In ICE, we have a company with a consistent track record of adjusted EPS growth over the past ~17 years.

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 just under $9.2B in FY2021.

ICE's strategy is to find unique and novel ways to apply data and technology to bring efficiencies and transparency to markets. As it has grown and diversified, ICE has broadened its opportunity set and its expertise has grown. This has provided new markets in which to grow and new ways to provide innovative solutions to customers.

By diversifying across asset classes and geographies and increasing the mix of recurring revenues, ICE has built a business that now generates compounding earnings growth; adjusted EPS has grown every year that ICE has been a public company. The net result of this compound EPS growth is the compound growth in ICE's dividend, which has grown double digits each year on average since the dividend was initiated in 2013.

Financials

Q2 and YTD2022 Results

Material related to the August 4, 2022 Q2 2022 Earnings Release is accessible here. The corresponding Form 10-Q is accessible here.

Through multiple acquisitions, ICE has diversified its revenue streams and now generates revenue through three reportable business segments:

  • Exchanges;
  • Fixed Income and Data Services; and
  • Mortgage Technology.

The Q2 2022 Earnings Presentation provides a high-level overview of how each segment has recently performed.

Over the years, ICE has steadily increased the degree of recurring revenue generated. In Q2 2022, just over 51% of the quarterly revenue was recurring.

Note 7 in the Q2 Form 10-Q (starts on page 16 of 110) discusses this consideration received that is yet to be recognized as revenue (Deferred Revenue). On ICE's Q2 2022 Balance Sheet, we see the Total deferred revenue was $0.575B as of June 30, 2022 of which $0.473B is current deferred revenue and $0.102B is in other non-current liabilities. This is money ICE has received in advance of rendering services.

In reviewing ICE's financial statements, it is apparent this is a 'capital light' business which lends to the generation of very strong Free Cash Flow.

ICE - Q2 2022 Performance - August 4, 2022

Source: ICE - Q2 2022 Earnings Presentation - August 4, 2022

Financial data for ICE's business segments are as follows for the 3 and 6 months ended June 30, 2022.

ICE - Business Segment Financial Data for the 6 Months Ended June 30, 2022

Source: ICE - Q2 2022 Form 10-Q

Free Cash Flow

In Q1 and Q2 2002, ICE generated FCF of $0.66B and $0.746B giving us YTD2022 FCF of ~$1.4B.

ICE - FCF Calculation Q2 2021 and Q2 2022 - August 4, 2022

Source: ICE - Q2 2022 Earnings Presentation - August 4, 2022

Debt

The following is a schedule of ICE's Debt on June 30, 2022, and December 31, 2021.

Shortly after reporting Q1 2022 results in May, ICE raised $8B in new long-term debt. It used $3B of these proceeds to refinance the 2022 and 2023 maturities and along with the proceeds from the sale of Euroclear, reduced ICE's commercial paper balances to zero with no maturities until the middle of 2025.

The remaining $5B is earmarked to fund a portion of the BKI acquisition. Management expects that the favourable rates on this new long-term debt and the current forward rate expectations for both ICE's commercial paper and term loan will enable the cost of debt to finance the BKI acquisition to be within its 4% - 4.5% projection.

ICE - Schedule of Debt as of June 30, 2022 and December 31, 2021

Source: ICE - Q2 2022 Form 10-Q

This is the schedule of debt on March 31, 2022, and December 31, 2021.

Details of the changes to ICE's debt which occurred in Q2 2022 are provided in the Q2 Form 10-Q commencing on page 18 of 110.

FY2022 Guidance

ICE's FY2022 guidance is as follows:

ICE - FY2022 Guidance - August 4, 2022

Source: ICE - Q2 2022 Earnings Presentation - August 4, 2022

Credit Ratings

ICE's current senior unsecured long-term debt credit ratings and outlook are:

  • 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 the bottom tier 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.

Dividends and Share Repurchases

Dividend and Dividend Yield

ICE's dividend history is accessible on the NASDAQ website; ICE does not maintain its dividend history on its website.

At the time of my October 29, 2021 post, ICE's quarterly dividend was $0.33/share. Shares were trading at ~$135.50 thus resulting in a dividend yield just shy of 1%.

On February 3, 2022, ICE announced a ~15% increase in its quarterly dividend to $0.38/share. The dividend yield was ~1.2% based on my ~$127 purchase price.

On May 5, 2022, ICE announced its 2nd $0.38/share quarterly dividend. Based on my $102.70 purchase price, the dividend yield is ~1.5%.

The 3rd consecutive $0.38/share quarterly dividend is payable on September 30, 2022 to stockholders of record as of September 16, 2022. Based on the current ~$107.44 share price, the dividend yield is ~1.4%.

Share Repurchases

ICE's weighted average diluted shares outstanding in FY2012 - FY2021 (in millions) is 365, 395, 573, 559, 599, 594, 579, 565, 555, and 565. The weighted average shares outstanding in Q2 2022 was 560 million.

Following the $11B acquisition of Ellie Mae from Thoma Bravo in September 2020, share repurchases were suspended until leverage fell below 3.25 times Adjusted Debt-to-EBITDA. This level was attained in Q4 and ICE reinstated its share repurchases and acquired $0.25B of outstanding shares during the quarter.

In December 2021, ICE's Board approved an aggregate of $3.15B for future share repurchases with no fixed expiration date that became effective on January 1, 2022. As of June 30, 2022, the remaining balance of Board approved funds for future repurchases was $2.5B.

During the 6 and 3 months ended June 30, 2022, ICE repurchased a total of 5.0 million and 1.3 million common shares for $0.632B and $0.157B. This consisted of 4.6 million shares for $582 million and 0.4 million shares for $50 million.

Given the proposed BKI acquisition, ICE has suspended share purchases until its leverage falls below 3.25x, which is anticipated to occur toward the end of 2024.

Valuation

ICE's diluted PE in FY2011 - FY2021 is 18.52, 16.46, 29.52, 66.86, 24.11, 23.09, 25.66, 17.00, 25.15, 31.76, and 25.23.

When I acquired shares in August 2020, the low/high and mean adjusted earnings estimates for FY2020 were $4.28 – $.4.81 and $4.40. I erred on the side of caution and used $4.30 with the $103.60 share price to give me a forward-adjusted PE of ~24.

At the time of my March 1, 2021 guest post at ValueofStocks, ICE had just reported FY2020 adjusted diluted EPS of $4.51. Using the current $110.31 share price, I arrived at an adjusted diluted PE of ~24.5.

On August 9, 2021, I reviewed ICE at which time ICE's share price was $120. Using this share price and FY2021 - FY2023 broker guidance, its valuation was:

  • FY2021 - 13 brokers - mean of $4.86 and low/high of $4.66 - $5.01. Using the mean estimate, the forward adjusted diluted PE is ~24.7 and ~24.5 if I use $4.90.
  • FY2022 - 13 brokers - mean of $5.22 and low/high of $5.06 - $5.53. Using the mean estimate, the forward adjusted diluted PE is ~23 and ~22.2 if I use $5.40.
  • FY2023 - 10 brokers - mean of $5.79 and low/high of $5.41 - $6.05. Using the mean estimate, the forward adjusted diluted PE is ~20.7 and ~20.3 if I use $5.90.

When I wrote my October 29, 2021 post, ICE was trading at ~$135.50 and its valuation based on broker guidance was:

  • FY2021 - 18 brokers - mean of $5.02 and low/high of $4.87 - $5.16. Using the mean estimate, the forward adjusted diluted PE is ~27.
  • FY2022 - 18 brokers - mean of $5.40 and low/high of $5.06 - $5.81. Using the mean estimate, the forward adjusted diluted PE is ~25.
  • FY2023 - 16 brokers - mean of $5.95 and low/high of $5.41 - $6.41. Using the mean estimate, the forward adjusted diluted PE is ~22.8.

In my February 4, 2022 post, I disclose the purchase of additional shares at ~$127. Its valuation based on broker guidance was:

  • FY2022 - 19 brokers - mean of $5.59 and low/high of $5.41 - $5.78. Using the mean estimate, the forward adjusted diluted PE is ~22.7.
  • FY2023 - 17 brokers - mean of $6.13 and low/high of $5.85 - $6.33. Using the mean estimate, the forward adjusted diluted PE is ~20.7.
  • FY2024 - 4 brokers - mean of $6.76 and low/high of $6.58 - $7.03. Using the mean estimate, the forward adjusted diluted PE is ~18.8.

On May 5, 2022, I acquired additional shares at ~$102.70. ICE's valuation based on broker guidance was:

  • FY2022 - 19 brokers - mean of $5.53 and low/high of $5.29 - $5.73. Using the mean estimate, the forward adjusted diluted PE is ~18.6.
  • FY2023 - 19 brokers - mean of $6.03 and low/high of $5.75 - $6.27. Using the mean estimate, the forward adjusted diluted PE is ~17.
  • FY2024 - 13 brokers - mean of $6.60 and low/high of $6.12 - $6.99. Using the mean estimate, the forward adjusted diluted PE is ~15.6.

I followed up my May 5 purchase with another purchase on May 9. I added to my exposure in a retirement account by acquiring shares at $99.925. Using the broker guidance at the time of my May 5th purchase, the valuation at the time of this purchase was:

  • FY2022 - 19 brokers - mean of $5.53 and low/high of $5.29 - $5.73. Using the mean estimate, the forward adjusted diluted PE is ~18.1.
  • FY2023 - 19 brokers - mean of $6.03 and low/high of $5.75 - $6.27. Using the mean estimate, the forward adjusted diluted PE is ~16.6.
  • FY2024 - 13 brokers - mean of $6.60 and low/high of $6.12 - $6.99. Using the mean estimate, the forward adjusted diluted PE is ~15.1.

Shares are now trading at ~$107.44. While broker guidance is likely to be amended over the coming day, the valuation based on the currently available broker guidance is:

  • FY2022 - 16 brokers - mean of $5.31 and low/high of $4.79 - $5.54. Using the mean estimate, the forward adjusted diluted PE is ~20.2.
  • FY2023 - 16 brokers - mean of $5.73 and low/high of $5.45 - $6.00. Using the mean estimate, the forward adjusted diluted PE is ~18.8.
  • FY2024 - 11 brokers - mean of $6.21 and low/high of $5.66 - $6.44. Using the mean estimate, the forward adjusted diluted PE is ~17.3.

Despite the recent runup in ICE's share price, ICE continues to be reasonably valued.

Final Thoughts

ICE is a growth company (annual revenue of ~$0.314B in FY2006, ~$6B in FY2016, and ~$9.2B in FY2021). It is not out of the realm of possibility that ICE will generate ~$12B in annual revenue by the end of FY2026. We should, therefore, not expect ICE's valuation to be similar to a slow-growth company.

ICE's growth periodically leads to a temporary increase in leverage. However, despite having recently raised financing for the BKI transaction, neither Moody's nor S&P Global have amended ICE's credit ratings. ICE also has a track record of rapidly deleveraging following prior acquisitions.

I hold 400 shares in the FFJ Portfolio and more shares in a retirement account. ICE was not a top 30 holding when I completed my Mid 2022 Investment Holdings Review. Nevertheless, I still like the company and, given its current reasonable valuation, would add to my exposure if I had 'dry powder' in the accounts that currently hold ICE shares.

I wish you much success on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

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.