TMX Group Limited - Stock Analysis

This TMX Group Limited (X.to) stock analysis is the final post in my series of analyses of Financial Data & Stock Exchanges industry participants. Please click here to access previous posts.

NOTE: All dollar values related to X are in $CAD.

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:

These industry participants released earnings on the following dates.

  • 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) - released 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.

X - 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.

As noted in previous posts within this series, one of the key risks is that established and new competitors, including disruptive technology providers, will challenge existing players.

X - Stock Analysis - Business Overview

X operates global markets and builds digital communities and analytic solutions that facilitate the funding, growth and success of businesses, traders and investors.

Details of each company within the group are accessible here.

X differs from the exchanges I have previously reviewed in that it is Canadian-based. It is also much smaller than its US-based peer group.

While some Canadian issuers seek a listing on another major North American or international exchange, the vast majority of issuers who qualify have historically listed on the TSX or TSXV and do not bypass a domestic listing.

Nevertheless, X does compete for listings with North American exchanges in a broad range of sectors and also internationally, particularly for resource companies and small and medium-sized enterprises.

The section entitled Competition Risk in X's FY2020 Annual Report addresses how X must compete with other exchanges domestically and internationally on listings, cash equities and equity option trading.

The Management's Discussion and Analysis portion of the FY2020 Annual Report provides a host of information from which to gain a good overview of X.

AST Canada Acquisition

On August 12, 2021, X completed the acquisition of AST Investor Services Inc. (Canada), and its subsidiary AST Trust Company (Canada), a leading provider of transfer agency, corporate trust and related services to Canadian public and private companies; this acquisition had been announced in September 2020. Terms of the transaction were $0.165B in total consideration, which included $30 million of cash for regulatory and non-regulatory purposes.

The rationale for this acquisition is to further diversify X's revenue streams and increase the proportion of recurring revenue.

A summary of this transaction is found on page 2 of 42 in the Q3 2021 Management's Discussion and Analysis.

X - Stock Analysis - Financials

Q3 and YTD2021 Results

On November 8, 2021, X released Q3 and YTD2021 results. These regulatory filings which include Management's Discussion and Analysis can be accessed here.

X's Q3 2021 Condensed Consolidated Interim Financial Statements are accessible here.

X - Stock Analysis - Credit Ratings

X's outstanding debt as of September 30, 2021 is reflected below.

X - Debentures Outstanding as of September 30, 2021

Source: X - Management's Discussion and Analysis - November 8, 2021

X - Debentures Effective Interest Rates as of September 30, 2021

Source: X - Management's Discussion and Analysis - November 8, 2021

X's debt, rated A (high) by Morningstar DBRS, is defined as follows:

'Good financial strength. The insurer’s capacity for the payment of policyholder and contract obligations is substantial, but of lesser financial strength than AA. May be vulnerable to adverse business and economic conditions, but qualifying negative factors are considered manageable.'

X's credit risk is acceptable for my purposes.

X - Stock Analysis - Dividends and Share Repurchases

Dividend and Dividend Yield

X's dividend history reflects a quarterly $0.77 dividend which yields ~2.3% based on the current ~$133.50 share price.

I expect one more quarterly $0.77/share dividend announcement in early February 2022 and anticipate an increase to $0.82 - $0.84 with the declaration in May.

Share Repurchases

During the 3 and 9 months ended September 30, 2021, nil and 86,600 common shares were purchased for cancellation under Normal Course Issuer Bid (NCIB) 2020, at an average price of nil and $126.88, and for a total amount of nil and $11.0 million, respectively. In the 3 and 9 months ended September 30, 2020, nil and 140,000 common shares were purchased for cancellation under NCIB 2020, at an average price of nil and $104.93, for a total amount of nil and $14.7 million, respectively.

On February 26, 2021, X announced its NCIB 2021 under which it can purchase for cancellation up to a maximum number of 560,000 of its common shares. Purchases under the NCIB 2021 were eligible to commence on March 4, 2021 and will terminate on March 3, 2022, or on such earlier date as the Company completes its purchases.

During the 3 and 9 months ended September 30, 2021, 140,000 and 420,000 common shares were purchased for cancellation under NCIB 2021, at an average price of $130.67 and $130.48, and for a total amount of $18.3 million and $54.8 million, respectively.

X's weighted average outstanding shares in FY2013 - FY2020 (in millions) is 54.12, 54.33, 54.38, 54.81, 55.73, 56.09, 56.57, and 56.95. For the 9 months ending September 30, 2021 the share count is ~56.2.

Despite X's share repurchases, the share count has increased over the years. I do not think investors should anticipate any meaningful reduction in the share count going forward.

X - Stock Analysis - Valuation

YTD diluted EPS is $4.43 with $1.70, $1.37, and $1.36 generated in Q1 - Q3.

Diluted EPS in FY2013 - FY2020 is $2.29, $1.85, ($0.96), $3.58, $6.60, $5.10, $4.38, and $4.91. The corresponding PE levels are 12.79, 27.20, 13.16, N/A, 18.02, 15.48, 23.53, and 28.32.

If X generates $1.40 in Q4 we arrive at FY2021 diluted EPS of $5.83. Using the ~$133.50 share price, the forward diluted PE is ~22.9.

In Q1 - Q3, X generated $1.88, $1.90, and $1.57 in adjusted diluted EPS for a YTD total of $5.35. If X generates $1.80 in Q4 then FY2021 adjusted diluted EPS should be ~$7.15. Based on the current ~$133.50 share price, the forward adjusted diluted PE is ~18.7.

Adjusted diluted EPS broker guidance derived from the two online trading platforms I use is:

  • FY2021 - 7 brokers - mean of $6.99 and low/high of $6.90 - $7.05. Using the mean estimate, the forward adjusted diluted PE is ~19 and ~19 if I use $7.05.
  • FY2022 - 7 brokers - mean of $6.98 and low/high of $6.64 - $7.39. Using the mean estimate, the forward adjusted diluted PE is ~19 and ~18 if I use $7.39.
  • FY2023 - 6 brokers - mean of $7.53 and low/high of $7.36 - $7.76. Using the mean estimate, the forward adjusted diluted PE is ~17.7 and ~17.2 if I use $7.76.

I place little credence in FY2023 estimates since this is too far in the future to estimate earnings with any degree of certainty.

X's valuation is below that of some of the other major North American exchanges; the adjusted diluted PE level for X's competitors is either in the 20s or 30s.

X's low growth potential explains why its valuation is below that of its peers; the following reflects FY2013 and FY2020 annual revenue:

  • CBOE: $0.572B - $3.427B
  • CME: $2.936B - $4.884B
  • ICE: $1.73B - $8.244B
  • NDAQ: $3.211B - $5.627B
  • X: $0.701B - $0.865B

Using the Bank of Canada's inflation calculator we see that ~$0.701B in 2013 is equivalent to ~$0.778B in 2020. When we account for inflation, X's growth is weaker than it appears.

X - Stock Analysis - Final Thoughts

I do not dispute that X offers valuable services. My decision not to initiate a position, however, lies in the fact X faces formidable competition from much larger and better capitalized US exchanges.

In comparing X to CME, ICE, NDAQ, and CBOE, I rank X as my least favourite of the group.

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

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long SPGI, MCO, CME, and ICE. I do not currently hold a position in X.to and do not intend to initiate a position within the next 72 hours.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.