I’m a giant fan of shares that fall within the progress/worth hybrid class. Corporations which might be worthwhile with a large moat, able to returning money to shareholders, and capable of develop constantly. These shares are, as a rule, compounders able to beating the market on a constant foundation.
Within the monetary sector, it isn’t at all times simple to seek out good compounders. Finance is a extremely aggressive, service-focused sector dominated by giant banks and monetary establishments.
Therefore, I am a fan of operators of inventory exchanges and associated companies. Considered one of these corporations is Intercontinental Change (NYSE:ICE), the proprietor of NYSE with a market cap of roughly $66 billion.
This firm is a top-tier compounder, which is not simply doing effectively because of its dominance in inventory exchanges, but in addition as a result of it’s more and more leveraging its capabilities utilizing new applied sciences and alternatives.
On this article, I wish to shed some mild on these developments, as I imagine that ICE is among the finest compounders in its trade that cash can purchase.
So, let’s get to it!
Headquartered in Atlanta, Georgia, ICE is a number one supplier of market infrastructure, information companies, and know-how options to a variety of shoppers, together with monetary establishments, firms, and authorities entities.
The corporate operates three segments.
|USD in Million||2021||Weight||2022||Weight|
|5,878||64.1 %||6,415||66.6 %|
Fastened Revenue and Knowledge Companies
|1,883||20.5 %||2,092||21.7 %|
|1,407||15.3 %||1,129||11.7 %|
- Exchanges Section ICE operates regulated marketplaces for buying and selling and clearing varied derivatives contracts and monetary securities. Its buying and selling venues embody 13 regulated exchanges and 6 clearing homes strategically positioned in main market facilities worldwide. These embody the New York Inventory Change.
- Fastened Revenue and Knowledge Companies Section ICE’s Fastened Revenue and Knowledge Companies phase presents mounted revenue pricing, reference information, indices, analytics, execution companies, world credit score default swaps (“CDS”) clearing, and multi-asset class information supply options.
- Mortgage Expertise Section ICE’s Mortgage Expertise phase goals to deal with inefficiencies within the US residential mortgage market. It supplies a know-how platform that gives superior digital workflow instruments from software by means of closing and the secondary market.
The corporate is constantly increasing its companies by means of M&A, which explains why it yields simply 1.4%. ICE just isn’t a high-yielding monetary inventory however an organization that’s nonetheless aggressively increasing by means of each natural and inorganic progress measures.
Having stated that, ICE has a terrific monitor report of progress. Because of its transaction-focused enterprise, it even did effectively throughout the Nice Monetary Disaster, which got here with exploding volatility. Since 2006, the corporate has grown its adjusted earnings per share by 16% per yr, which makes it one of many strongest performers in its sector.
This additionally resulted in great shareholder worth.
Over the previous 5 years, the common annual dividend progress fee was 12.7%.
The corporate has a sub-30% payout ratio and a yield of 1.4%. This yield is the one difficulty on its dividend scorecard, as its monetary sector friends typically have larger yields.
Whereas a 1.4% yield is not one thing to jot down house about, it is a easy trade-off.
ICE comes with larger progress than most high-yielding shares. Buyers searching for an honest complete return would possibly profit from shopping for ICE. Buyers requiring revenue will probably be compelled to purchase a better yield.
Trying on the previous ten years, we see that ICE has returned roughly 270%, together with dividends. This beats the S&P 500 by greater than 40 factors. It beats the monetary sector by a good wider margin.
Having stated that, ICE is now busy boosting its capabilities, which might end in a continuation of its spectacular progress streak.
How ICE Is Optimizing Its Enterprise
I personal CME Group (CME), which is a competitor of ICE. What fascinates me about companies like CME and ICE is their potential to make use of present capabilities and leverage these into different services and products.
Each CME and ICE are actually way over simply corporations that profit when a dealer buys or sells a futures contract, inventory, or related product.
Throughout this yr’s Bernstein Annual Strategic Selections Convention, ICE elaborated on its technique and plans to take its enterprise to the subsequent degree.
Primarily, the aim is to create an all-weather inventory that may develop in any financial local weather. The corporate believes it has the instruments and adaptability to navigate excessive or low-interest fee environments and even recessions. I agree with that.
An enormous a part of its enterprise technique is M&A – together with the disposition of companies that aren’t doing too effectively. For instance, the pending acquisition of Black Knight (BKI) to boost its mortgage enterprise just isn’t going easily. Basically, the corporate believes that M&A challenges are rising – not simply within the US. Whereas I am making assumptions right here, I imagine that it will shift the main target to natural progress – wherever doable.
Moreover, ICE’s vitality enterprise has skilled challenges lately, together with points in Russia and Europe. Nevertheless, the corporate stays optimistic concerning the outlook for the vitality market.
ICE, which owns the well-known Brent crude oil futures, has expanded its portfolio of tradable belongings within the vitality area to replicate the worldwide vitality transition away from petroleum merchandise.
The corporate sees progress alternatives in vitality transition merchandise, reminiscent of renewable vitality, carbon emissions, and environmental merchandise.
Whereas it isn’t renewable, this additionally consists of profitable benchmarking of liquid pure fuel merchandise like Northwest LNG contracts.
With regard to inflation, ICE has lately taken pricing actions to guard its margins. Traditionally, the corporate didn’t contemplate adjusting costs, particularly throughout an extended interval of subdued rates of interest and inflation.
Nevertheless, with their very own prices rising, ICE has began to lift costs modestly. The suggestions obtained thus far has been restricted, as these value will increase have had minimal influence on clients.
Having stated that, ICE can also be engaged on larger issues. This consists of optimizing its mortgage enterprise.
Through the aforementioned Bernstein convention, the corporate talked about that it has been lobbying and dealing on altering legal guidelines on the state degree to allow digitized mortgages.
Solely a small share of mortgages within the US have gone by means of a digital be aware course of, which presents a major alternative for innovation.
Therefore, ICE has developed a digital be aware and collaborates with Fannie Mae and Freddie Mac, in addition to early adopter lenders, to streamline the mortgage course of.
Primarily, the aim is to offer software program that may underwrite a mortgage whereas the borrower is filling out the applying, lowering the 60-day processing time and bettering effectivity.
ICE believes there’s a large must standardize the mortgage course of, as 1000’s of lenders have developed their very own programs and software program, leading to pointless complexity.
By standardizing the method, round 80% of debtors might be put right into a standardized product with digitized info available to decision-makers.
ICE goals to persuade giant banks with legacy programs that standardizing the mortgage course of is possible and useful.
Even higher, the corporate is beginning to hyperlink its mortgage enterprise to its alternate enterprise by means of initiatives like Fee Lock futures. These futures present real-time info on rates of interest for mortgages, enabling shoppers and lenders to make extra knowledgeable selections.
However wait, there’s extra.
ICE goals to standardize the money marketplace for shopper debt, just like what has been achieved within the company debt market. By offering extra transparency and innovation within the shopper debt area, ICE believes there’s important progress potential.
ICE foresees the creation of extra focused and particular rate of interest merchandise for shopper debt, just like the differentiation seen within the vitality market.
I imagine there’s positively a marketplace for it. Not solely is the non-housing shopper debt market enormous, but it surely additionally comes with the necessity to hedge dangers for operators within the trade.
Moreover, relating to managing its information, ICE has chosen to not type strategic partnerships with cloud suppliers, taking a cloud-agnostic method.
The corporate runs its personal intensive information heart infrastructure and permits clients to attach their cloud supplier to ICE’s community.
The corporate has issues concerning the escalating prices of cloud companies, the shortage of management over these prices, and the contractual relationships with cloud suppliers.
ICE prefers to keep up management over prices and keep away from potential copyright and income mannequin points related to cloud-based AI companies.
ICE is in a terrific place to spice up shareholder returns, as analysts anticipate the corporate to constantly develop free money move to nearly $4.0 billion in 2025. That might suggest a free money move yield of roughly 6%.
The corporate has a 2.8x 2024E internet leverage ratio and an A- credit standing, which implies there’s loads of monetary room to spice up shareholder returns down the highway.
It additionally implies that the corporate is buying and selling at 18x subsequent yr’s anticipated free money move.
Whereas I am utilizing subsequent yr’s estimates, I imagine that is a very good deal. The corporate often trades near 24x free money move. The identical goes for the ahead EV/EBITDA ratio.
Primarily based on every little thing mentioned on this article thus far, I imagine that ICE shares are about 33% under their truthful worth.
This could put my goal value at roughly $155, which is among the highest.
Nevertheless, I don’t imagine that ICE will proceed its present uptrend with out hiccups. The latest inventory value rally was large, whereas financial challenges persist. As most readers would possibly know, I am nonetheless within the camp of people that imagine that inflation hasn’t been defeated.
Present developments, particularly the weaker greenback, make it very seemingly that inflation will transform extra sticky than initially anticipated.
So, if individuals are considering ICE, I might advocate constructing a place on potential inventory value weak point down the highway.
Intercontinental Change stands out as a top-tier compounder within the monetary sector. With a dominant place in inventory exchanges and a give attention to leveraging new applied sciences, ICE has constantly outperformed the market.
The corporate’s progress monitor report and spectacular dividend progress fee showcase its potential to create shareholder worth. By increasing its companies by means of strategic acquisitions and natural progress, ICE is optimizing its enterprise and adapting to altering market dynamics.
From enhancing its mortgage know-how phase to exploring alternatives in vitality transition merchandise, ICE is poised for continued progress.
I imagine ICE shares are attractively valued.