The shares of Intercontinental Exchange (NYSE: ICE ) has gained about 11% YTD, compared to the 18% increase in the S&P500 over the same period. Further, at the current price of $114 per share, ICE stock is trading 11% below its fair value of $129 – Trefis’ estimate for The valuation of Intercontinental Exchange.
Amidst the current financial backdrop, ICE shares have seen little change, moving slightly from levels of $115 in early January 2021 to around $115 now, versus an increase of around 20% for the S&P 500 over this roughly 3-year period. Notably, ICE stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 19% in 2021, -25% in 2022, and 11% in 2023 (YTD). By comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that ICE underperformed the S&P in 2021, 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – it’s been tough over the past few years for individual stocks; for heavyweights in the Financial sector including V, JPM and MA, and even for the mega-cap stars GOOG, TSLA and MSFT. In contrast, the Trefis High Quality (HQ) Portfoliowith a collection of 30 shares, has outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller coaster as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and high interest rates, ICE could face a similar situation as it did in 2021, 2022 and 2023 and underperforms the S&P over the next 12 months – or will it see a sharp jump?
The company posted mixed results in the third quarter of 2023, with revenue beating estimates but revenue missing expectations. It reported net income (revenue minus transaction-based expenses) of $2 billion – up 11% yoy. The increase was mainly due to a 26% drop in transaction expenses, followed by a 5% increase in fixed income and data services and a 20% increase in mortgage technology income. On the expense front, operating expenses increased 29% yoy in the quarter. However, the negative impact was more than offset by an improvement in other income from -$1.24 billion to -$163 million. Overall, adjusted net income was $541 million, compared to a net loss of $191 million in the prior-year period.
Net income grew 5% indeed to $5.79 billion in the first three quarters of FY2023. It was mainly due to lower transaction-based expenses and a 7% increase in the fixed income and data services. Furthermore, operating expenses as a percentage of revenues witnessed an unfavorable increase during the same period, but the effect was more than offset by higher other revenues. Overall, adjusted net income rose 95% indeed to $1.99 billion.
Going forward, we expect Q4 results to be on similar lines. In general, Earnings from Intercontinental Exchange (total revenues) are estimated to touch $9.72 billion in FY2023, translating into net revenues of approximately $8.02 billion. Additionally, ICE’s adjusted net income margin is likely to improve on the year, leading to annual GAAP EPS of $5.62. This coupled with a P/E multiple of 23x will lead to a valuation of $129.
returns | Nov 2023 MTD (1) |
2023 YTD (1) |
2017-23 Total (2) |
ICE Return | 6% | 11% | 103% |
S&P 500 Return | 8% | 18% | 103% |
Hit Enhanced Value Portfolio | 8% | 27% | 551% |
(1) Month and year-to-date from 11/23/2023
(2) Cumulative total profit since the end of 2016
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