This Intercontinental Exchange, Inc. (ICE) stock analysis is the 7th in my series of analyses of Financial Data & Stock Exchanges industry participants. Please access the archives to read previous posts.
My most recent prior ICE post is accessible here.
I view the Financial Data & Stock Exchanges industry as an attractive industry in which to invest for the long term. I currently have exposure to the following in retirement accounts, for which I do not disclose details, and/or in the FFJ Portfolio:
- S&P Global (SPGI) - guest post at Dividend Power
- Moody's (MCO)
- CME Group (CME) - guest post at Dividend Power
- Intercontinental Exchange (ICE)
These industry participants will release earnings on the following dates. I intend to review each company shortly following their respective earnings release.
- FactSet Research Systems Inc. (FDS) - released September 28
- Nasdaq, Inc. (NDAQ) - released October 20
- S&P Global Inc. (SPGI) - released October 26
- MSCI Inc. (MSCI) - released October 26
- CME Group Inc. (CME) - released October 27
- Morningstar, Inc. (MORN) - released October 27
- Intercontinental Exchange, Inc. (ICE) - released October 28
- Moody's Corporation (MCO) - released October 28
- CBOE Global Markets, Inc. (CBOE) - released October 29
- TMX Group Limited (X.to) - November 8
Value Line, Inc. (VALU) released its Q1 2022 results for the quarter ending July 31 on September 13, 2021. This is a small-cap company ($0.31B market cap). I do not invest in small-cap companies, and therefore, do not intend to review it.
Intercontinental Exchange - Stock Analysis - Industry Overview
Further commentary about the industry and how industry participants are expanding into adjacent lines of business is found in my recent FactSet Research post.
Intercontinental Exchange - Stock Analysis - Business Overview
ICE continues to diversify its revenue streams through a series of acquisitions with most notably the $11B Ellie Mae acquisition from Thoma Bravo which closed in September 2020. This acquisition is being combined with the previously acquired MERS and Simplifile to build and strengthen ICE's position in the mortgage technology and fixed-income data services business lines.
When ICE acquired Ellie Mae, it suspended share repurchases until such time as leverage was reduced to below 3.25 times Adjusted Debt-to-EBITDA. I envision this to also be the level at which ICE will consider additional major acquisitions.
ICE’s Exchange business segment continues to be the largest segment despite increasingly intense price competition. It has benefited from a surge of retail interest in equity markets but competition among equity exchanges is driving net revenue per share so low that an increase in equity trading volume only has a small impact on ICE’s bottom line. ICE has, therefore, been increasingly turning to data, listing, and connectivity fees to supplement its transaction fees at the NYSE.
The derivatives business remains strong, with its energy complex showing particular strength. ICE still benefits from pricing power and growth in trading volume. I anticipate ICE can grow this area of business at mid-single-digit rates over the next several years.
Please read Part 1 of ICE's FY2020 10-K in which there is a comprehensive overview of the company's history, business strategy, competitive landscape, risk factors, and more.
Intercontinental Exchange - Stock Analysis - Financials
Q3 and YTD2021 Results
On October 28, 2021, ICE released its Q3 2021 Form 10-Q and the accompanying earnings release and earnings presentation.
ICE reported strong revenue, operating income and EPS growth. This includes double-digit growth in recurring revenues from all three business segments.
Free Cash Flow
YTD FCF is ~$2B thus enabling the reduction in debt.
In Q3, ICE used the proceeds from commercial paper issuances and cash on hand to fund the redemption of $1.25B of senior floating rate notes due in June 2023.
The following is a schedule of ICE's Long-Term Debt as of September 30, 2021.
ICE's Q4 2021 total recurring revenue projection is $0.892B - $0.907B with a breakdown as follows:
- Exchanges: $0.33B - $0.335B ;
- Fixed Income & Data Services: $0.415B - $0.42B; and
- Mortgage Technology: $0.147B - $0.152B.
The Q4 2021 GAAP operating expenses projection is $0.922B - $0.932B and the adjusted operating expenses projection is $0.737B - $0.747B including ~$10 million related to Bakkt. ICE announced in January 2021 that Bakkt would become a publicly-traded company via a merger with VPC Impact Acquisition Holdings (VIH), a special purpose acquisition company (SPAC) sponsored by Victory Park Capital. Bakkt Holdings, Inc. (BKKT) is now listed on the NYSE.
Q4 2021 GAAP non-operating income is expected to be $1.185B - $1.19B, including an expected ~$1.3B gain on the Bakkt merger. Adjusted non-operating expense is expected to be ~$0.1B - ~$0.105B.
Intercontinental Exchange - Stock Analysis - Credit Ratings
Moody's downgraded ICE's senior unsecured long-term debt credit rating from A2 to A3 following the Ellie Mae acquisition; the revised rating is the lowest tier of the upper-medium investment-grade category.
S&P Global also lowered ICE’s long-term credit rating to BBB+ which is one notch lower than Moody’s rating. It is the top tier of the lower-medium investment-grade category.
Moody’s rating defines 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.
S&P Global's rating defines ICE as having an ADEQUATE capacity to meet its financial commitments. It is, however, more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
The outlook from both rating agencies is stable.
Dividend and Dividend Yield
ICE's dividend history is accessible on the NASDAQ website; ICE does not maintain its dividend history on its website.
On October 28, 2021, ICE announced a $0.33/share dividend payable on December 31 to stockholders of record as of December 17.
In Q3, ICE's dividend distribution was $0.187B which includes the payment of dividend equivalents on unvested employee restricted stock units. YTD, ICE has distributed ~$0.561B versus $0.5B in the same timeframe in FY2020.
With shares trading at ~$135.50 and a $0.33 quarterly dividend, the dividend yield is just shy of 1%.
ICE suspended share repurchases until leverage falls below 3.25 times Adjusted Debt-to-EBITDA. The increase in ICE's leverage is the result of its $11B acquisition of Ellie Mae from Thoma Bravo.
ICE reduced leverage to 3.8 times by the end of Q1, just under 3.4 times at the end of Q2, and 3.2 times at the end of Q3.
The resumption of share repurchases is anticipated in Q4.
The weighted average share count for the 4th quarter is expected to be 563 million - 569 million. This excludes the impact of any potential share repurchases.
Intercontinental Exchange - Stock Analysis - Valuation
ICE's diluted PE in FY2011 - FY2020 is 18.52, 16.46, 29.52, 66.86, 24.11, 23.09, 25.66, 17.00, 25.15, and 31.76. It has generated $4.48 in YTD2021 diluted EPS and I envision FY2021 EPS of ~$5.60. Using this estimated range and the current share price, the forward diluted PE is ~24.
Please reference my August 9, 2021 post in which I provide ICE's valuation based on adjusted diluted EPS at the time I initiated a position in August 2020 and at the time of subsequent ICE posts.
ICE is now trading at ~$135.50 and broker guidance derived from the two online trading platforms I use is:
- 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 and ~26.2 if I use $5.16.
- 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 and ~23.3 if I use $5.81.
- 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 and ~21 if I use $6.41.
I anticipate these broker estimates will be adjusted higher in the coming days since ICE has just released Q3 and YTD results.
Intercontinental Exchange - Stock Analysis - Final Thoughts
I like the company's long-term outlook and hold ICE shares in a 'Core' and a 'Side' account in the FFJ Portfolio.
ICE's valuation is much the same as when I made my previous purchases. I think long-term investors will receive an attractive return on investment if shares are purchased at the current valuation.
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 SPGI, MCO, CME and 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.