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Intercontinental Exchange Inc. (ICE)

Seven analysts have increased their 2016 earnings estimates for this financial company in the past 30 days.

Intercontinental Exchange Inc. (ICE)
From Argus Weekly Staff Report

We are raising our rating on Intercontinental Exchange Inc. (ICE) to BUY from HOLD on valuation. The shares have sold off sharply since the company’s 4Q earnings report on February 4, and the 2016 consensus earnings estimate has fallen. We believe that these declines have been driven by management’s higher-than-expected forecast for expenses related to new growth initiatives. That said, we view the slight reduction in the consensus earnings estimate as a one-time event that does not change the company’s broad growth story or its prospects for synergies from the IDC acquisition. We view the selloff as overdone. Looking ahead, we expect the consensus estimate to stabilize or move higher with help from strong trading volumes in risk-management products and merger-related synergies.

ICE won the bidding for Interactive Data Corp in October and completed the acquisition in December 2015. IDC provides pricing, reference data and trading solutions to banks, mutual funds and asset managers, and helps these customers to optimize the use of capital when managing risk. We see the acquisition fitting nicely with ICE’s plans to expand its data business. However, ICE will need to generate significant synergies from IDC to justify the relatively high acquisition price of $5.2 billion (70% cash and 30% stock).

Meanwhile, core organic earnings at Intercontinental should benefit from greater demand for risk-management products. Volumes have started off strongly in 2016. January futures volume rose 15% from the prior year, driven by heavy market volatility, with interest rate volumes up 27%, oil up 23%, and cash equities up 28%.

We look for revenue growth of 37% in 2016, reflecting both high single-digit organic growth and a strong contribution from the IDC acquisition. We are raising our 2016 EPS estimate to $14.27 from $14.10 based on strong trading volumes midway through the first quarter. We are also boosting our 2017 estimate to $15.94 from $15.73.

We believe that the recent pullback in ICE shares provides an attractive entry point. The shares are currently trading at 16.5-times our 2016 EPS estimate, below the low end of their historical average range in the high teens to low 20s. Our new target of $270 implies a multiple of 19-times our 2016 EPS forecast, closer to the historical average multiple.

Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, February 22, 2016