Nasdaq (NDAQ) Remains Focused on Growth from Acquisitions

On Nov 26, we issued an updated research report on Nasdaq OMX Group Inc. (NDAQ), assessing its opportunities and challenges in the foreseeable future.

Nasdaq is focused on growth from acquisitions and organic initiatives that enable entry and cross-selling opportunities into new markets on a low cost and highly flexible platform. Alongside, an improving leverage and strong cash flow, which spiked 20.8% year over year in the first nine months of 2014, also support growth initiatives and accelerated capital deployment, thereby boosting investor confidence. From Jan 2010 to Oct 2014, Nasdaq returned $2.74 billion through share repurchases.

Moreover, Nasdaq’s initial public offering (IPO) pipeline (up 72% in the first nine months of 2014) remains strongest industry-wide. A robust pipeline of accounts from eSpeed, new products from Thomson Reuters in the coming quarters and potential market opportunities are further projected to drive growth in the Technology Solutions’ portfolio.

The company’s operating margin has also been witnessing improvement for the past couple of quarters, given disciplined expense management. However, expenses are likely to grow about 7–9% in 2014. Meanwhile, top line faces challenges from a volatile exchange rate, and lower volumes in derivative and fixed income. Notably, equity options are generating sluggish volumes in both the U.S. (down 1.9% year over year until Oct 2014) and European (down 11.1%) markets. Even clearing volumes declined 7.7% in the first nine months of 2014.

Headwinds related to competition, currency and pricing also mar the desired upside. The limitations indicate Nasdaq’sneed to respond to changing industry dynamics.

Earnings Review

This Zacks Rank #3 (Hold) stock kept its earnings streak alive in the trailing four quarters with an average beat of 2.9%. The company’s third-quarter 2014 earnings of 72 cents a share also outshone the Zacks Consensus Estimate by 2.9% and the year-ago quarter figure by 9.1%.

Meanwhile, a balanced risk-reward profile in the near term led to minor downward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 and 2015 are now pegged at $2.89 and $3.25 per share, down 1 cent and 5 cents a share, respectively, in the last 60 days. However, on a year-over-year basis, earnings are expected to grow by 11.2% and 12.5% in 2014 and 2015, respectively.

Nasdaq Hits 52-Week High

Shares of Nasdaq scaled a new 52-week high of $44.87 on Nov 26, buoyed by a steady growth momentum.Notably, the stock appreciated about 15.6% since the beginning of 2014.

Yesterday’s closing price represents a solid six-month return of about 21.4%, against 13% clocked by the S&P 500 index. While 491.1K shares exchanged hands in the latest trading session, the average volume of shares traded over the last three months stands at approximately 929.1K.

Key Picks in the Sector

While we remain at the periphery with regard to Nasdaq at present, investors interested in the exchange industry could consider stocks like Intercontinental Exchange Inc. (ICE), which sports a Zacks Rank #1 (Strong Buy). CME Group Inc. (CME) and CBOE Holdings Inc. (CBOE), both with a Zacks Rank #2 (Buy), are other promising picks.

Read the Full Research Report on ICE
Read the Full Research Report on CME
Read the Full Research Report on NDAQ
Read the Full Research Report on CBOE


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