NASDAQ Exchanging Doubts for Confidence

1/24/2011


  Recent Price
$24
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
13
  Shares (millions)
204
  Long-Term Debt as % of Capital
27%
  52-Week Price Range
$24.34 - $17.18

About 3,600 companies trade on NASDAQ OMX Group's ($24; NDAQ) exchanges, where an average of 8.8 billion shares changes hands each day. The company controls about two-thirds of trades involving NASDAQ securities and half of New York Stock Exchange securities. It also holds about one-third of the U.S. options-trading market.

Over the last five years, NASDAQ's revenue rose at an annualized rate of 32%, with operating cash flow up 43%. Operating profit margins have expanded in the past three calendar years, and 2010 should be no different. The margin topped 26% in the September quarter, up from 22% a year ago. Earning a Quadrix® Value score of 89 and Overall rank of 95, NASDAQ is a Buy.

Business breakdown

NASDAQ offers the world's biggest exchange for the technology and biotech industries. Revenue fell 8% in the nine months ended September, hurt by an ongoing shift toward a transaction-based business that delivers recurring revenue streams and could help NASDAQ capture more market share.

The company splits its operations into three segments:

• Market services (68% of total revenue for the nine months ended September, 3% growth in that period) derives most of its revenue from selling quote and trade information to financial-market participants and data distributors.

• Issuer services (23% and 4%) generates fees from annual renewals, listings of additional shares, and initial listings. Annual renewal fees slipped in the first nine months of 2010 because of 302 delistings, partially offset by 131 new listings. The market for initial public offerings should continue to improve. Just one month into 2011, 110 companies had filed to go public — equaling the total number that went public in all of 2010.

• Market technology (9% and 6%) provides services related to trading, clearing, settlement, and information dissemination. It also offers market surveillance for exchanges and brokers. NASDAQ powers more than 70 exchanges in 50 countries.

In 2010, NASDAQ stepped up its stock repurchases, shrinking the share base 5% in the first nine months of the year. Then in December, NASDAQ repurchased $497 million of stock (about 11% of outstanding shares) from its largest shareholder, Borse Dubai, which needed to raise funds. To finance this latest buyback, NASDAQ raised $370 million through a debt offering.

The stock has marched steadily upward since August, ending each month higher than the last, and rising 36% during that stretch. But the valuation remains attractive, with shares trading at 13 times trailing earnings, 12% below their five-year average. The stock also trades at a discount based on its three-year averages for price/sales and price/book.

Conclusion

The 2011 consensus targets 21% higher per-share profits, and estimates are on the rise. NASDAQ's stock trades at 10 times the 2011 profit estimate, 20% cheaper than its chief peer, NYSE Euronext ($32; NYX), owner of the New York Stock Exchange. An annual report for NASDAQ OMX Group Inc. is available at One Liberty Plaza, 165 Broadway, New York, NY 10006; (212) 401-8700; www.nasdaqomx.com.

 

NASDAQ OMX GROUP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '10
0.50
vs.
0.42
-7%
20.54
-
17.18
11 - 9
Jun '10
0.52
vs.
0.47
- 1%
23.11
-
17.54
13 - 10
Mar '10
0.43
vs.
0.48
-15%
21.33
-
17.87
12 - 10
Dec '09
0.46
vs.
0.53
-20%
21.02
-
17.63
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2009
3.41
1.83
0.00
27.39
-
17.51
15 - 10
2008
3.65
2.01
0.00
49.90
-
14.96
25 - 7
2007
2.44
1.57
0.00
50.47
-
26.57
32 - 17
2006
1.66
0.75
0.00
46.75
-
23.91
62 - 32
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
67
89
76
41
81
69

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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