JPMorgan Sees Little Upside In Intercontinental Exchange

JPMorgan moved to a Neutral rating on Intercontinental Exchange Inc

, after a period of restriction, on lower return on invested capital (ROIC). Previously, JPMorgan had rated ICE Overweight. However, the price target remains unchanged at $284. "ICE remains a favorite name longer term as we see the management team as one of the best in terms of its ability to execute on its initiatives. Our Neutral rating reflects our concerns that the decline in its ROIC will weigh on ICE's valuation limiting the P/E multiple expansion needed to reach the more consensus year-end upside of $300," analyst Kenneth Worthington wrote in a note. Worthington estimates that ICE's ROIC is a more tepid 8.3 percent, down from 20 percent prior to ICE's mergers with NYSE, SuperDerivatives and other smaller deals such as the Holland Clearing House. Since ICE remains focused on growth through acquisitions, the analyst said it could be tough for ICE to generate "the same level of accretion on larger deals where equity is required given higher target multiples and more modest ICE valuation." Further, Worthington continued that Open Interest trends lag, but mix improves. "We continue to view Open Interest as a leading indicator for future volumes. Over the last sixteen months, open interest growth has slowed to ~0% at ICE," Worthington noted. Despite solid volumes in 2016, the analyst is concerned that the outlook for top-line growth could be more modest than expected if trading volumes match lackluster OI growth. In addition, cost cutting and data increases certainty of growth and ICE could leverage its existing exchange client base to generate additional income. "Should ICE be able to grow IDC's top line at the mid- to high-single digit pace it suggests, ICE's earnings could surprise to the upside and its multiple could recover more than we currently expect," the analyst highlighted. The analyst has cut his 2016 EPS view to $13.78 from $13.94. Street expects earnings of $13.98 for the full year. "We emphasize we are longer term fans of both the company and the management team, but are hoping to find a better entry point that offers us more compelling upside," Worthington added. At the time of writing, shares of ICE were down 0.59 percent to $269.64.