Nasdaq Retained at Neutral - Analyst Blog

On Apr 9, 2013, we reiterated our Neutral recommendation on Nasdaq OMX Group Inc. (NDAQ) based on its diversified growth strategy and expense management, which is partially offset by higher debt concerns and market competition.

Why the Retention?

Estimates for this global stock exchange witnessed minor corrections since the company reported its fourth-quarter 2012 results on Jan 31. Nasdaq's fourth-quarter earnings per share of 64 cents and net revenue of $419 million comfortably surpassed the Zacks Consensus Estimate of 61 cents and $412 million, respectively.

Results reflected lower industry trading volumes and unfavorable currency fluctuations, partly mitigated by higher order intakes and flattish expense growth, on a year-over-year basis. Operating margin was 44.4%, almost in line with 44.5% in the year-ago quarter, led by a faltered top line.

Nasdaq's strategic initiatives have helped it improve its total debt-to-EBITDA ratio to 2.3x in 2012 from 2.4x in 2011 and 2.9x in 2010, with the reduction in debt obligations. The company is making investments to diversify its business profile to well-align with the current market dynamics. Additionally, increased retained earnings and free cash flow along with the ongoing strategic business initiatives are expected to generate improved earnings and operating cash flow in the long run.

The over $1.0 billion worth of proposed acquisitions (eSpeed and the corporate arm of Thomson Reuters), scheduled to culminate by mid-2013, are likely to be accretive to earnings. However, ratings agency Moody's Investor Service of Moody's Corp. (MCO) has indicated the likelihood of an additional downgrade given the accretion in debt followed by these acquisitions.

Going ahead, increased competition amplify the risk of hampering growth in trading activities, pricing and the markets for the company's products, thereby adversely affecting the operating results and market share.

Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 inched down 1.4% to $2.73 per share in the last 60 days. Additionally, the Zacks Consensus Estimate for 2014 edged down 1.9% to $3.07 per share in the last 60 days. With the Zacks Consensus Estimates for both 2013 and 2014 witnessing a downward trend in the near term, Nasdaq now has a Zacks Rank #4 (Sell).

Other Financial Stocks That Warrant a Look

While we see slight downward pressure on Nasdaq in the near term, other stocks in the financial sector that are outperforming include Moody's, Euronet Worldwide Inc. (EEFT) and Columbia Banking System Inc. (COLB). All of these carry a Zacks Rank #1 (Strong Buy).