Updated Research Report on Nasdaq - Analyst Blog

On Jun 18, we issued an updated research report on Nasdaq OMX Group Inc. NDAQ. Although the company's debt level remains historically high, it is gradually improving. Meanwhile, benefits from recent acquisitions and Nasdaq's organic growth profile are partly offset by higher expenses.

This Zacks Rank #3 (Hold) stock delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 2.7%. The company's first-quarter earnings also breezed past the Zacks Consensus Estimate by 1.4% and the year-ago quarter figure by 12.5%.

Nasdaq's organic growth (9% in first-quarter 2014) is being aided by itsgrowth strategy of accelerating its non-transaction revenue base, which includes technology and information revenue, injecting dynamism into its business profile. This business recorded impressive revenue growth in 2013 and first-quarter 2014 (up 27% year-over-year and accounting for 72% of total net revenues).

Moreover, the Thomson Reuters, eSpeed and BWise acquisitions are supporting non-transaction business growth. Management also aims its Technology Solutions margins to reach 20% by 2015-end from 6% in first-quarter 2014. New products are further projected in 2014 from this portfolio.The company also topped the listings market as its number of initial public offerings (IPOs)rose 52% in 2013 and 64% in first-quarter of 2014, indicating an improved outlook for 2014.

Meanwhile, reduction in total debt obligations resulted in improved total debt-to-EBITDA of 2.6x at Mar 2014-end from 3.3x at 2013-end, which had deteriorated from 2.3x in 2012. Nevertheless, Nasdaq has shelved its share buyback program for almost an year now, until it resumes a total debt-to-EBITDA ratio of about 2.5x by mid-2014. Furthermore, the company faces headwinds from intense competition, sluggish trading activity and higher expenses, which weigh on margins and operating leverage.

Overall, a cautious risk-reward balance in the near term led to downward estimate revisions for 2014 and 2015. Hence, the Zacks Consensus Estimate for 2014 and 2015 are now pegged at $2.92 and $3.32 per share, down 1.4% and 1.2%, respectively, in the last 30 days.

Key Picks in the Sector

While we remain at the periphery with regard to Nasdaq at present, better-ranked stocks in the financial sector include Ladder Capital Corp. LADR, Euronet Worldwide Inc. EEFT and VeriFone Systems Inc. PAY. All these stocks sport a Zacks Rank #1 (Strong Buy).