What Stock Benefits From Stormy Markets But Shuts Down in a Storm?
Good news for investors – the S&P 500 is still up 11.85% for 2012, even after the recent selloff – has been bad news for the bottom line of NYSE Euronext (NYX), the global exchange company that owns the New York Stock Exchange, London’s futures exchange and a raft of other European and global financial markets. That’s because the less uncertain investors are, the lower volatility levels tend to be; certainly, the diminishment of volatility has been one of the hallmarks of financial markets over the course of 2012.
Combined with rock-bottom interest rates and guidance from central bankers that those rates aren’t likely to rise for years, that means that demand by investors for the kinds of hedging products like options and futures contracts of the kind traded on the New York Stock Exchange and London’s Liffe has diminished.
NYSE Euronext managers have long been emphasizing new sources of revenue as trading revenues have come under pressure, but customers have cut back on their spending for technology. But CEO Duncan Niederauer acknowledged that the company isn’t making progress rapidly enough in this area and that "a large portion of our earnings remain linked to trading." Moreover, capital spending in the sector has tumbled as much as 20% in 2012 over year-ago levels, he added.
The result of this is a familiar pattern: while NYSE Euronext is managing to squeak out higher profits over 2012 as a whole, as seen in the chart above, it is doing so on the basis of lower revenues. Now, the only question is whether the company is poised for a rebound and whether it’s enough of a bargain to snap up in the wake of the decline in the share price on the news of the tremendous earnings disappointment.
On the valuation front, the jury is out. True, the price/book ratio has fallen below 1, below its long-term average. Similarly, the PE ratio has tumbled, but the stock isn’t trading at a dramatic discount to the broader market – at least, not enough to make the stock a compelling “buy” in the absence of firm evidence that its restructuring story is bringing about results. NYSE Euronext does intend to cut about $250 million a year in annual costs via a program with the moniker “Project 14”, and is in the midst of selling off under-performing investments, closing 60% Paris-based BlueNext SA (a carbon-trading platform) and selling minority interests in other exchanges.
As soon as evidence begins to trickle in that this turnaround plan is having an impact on NYSE Euronext’s financial results, however, the exchange company is poised for a turnaround; it remains the bargain amongst its peers, priced at a discount to rivals CME Group (CME), Nasdaq OMX Group (NDAQ) and Intercontinental Exchange (ICE).
Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis