Now's A Buying Opportunity In NASDAQ OMX Group, Credit Suisse Says

In a report published Thursday, Credit Suisse analyst Ashley N. Serrao maintained an Outperform rating on NASDAQ OMX Group, Inc. NDAQ, with a price target of $55, saying that unexpectedly strong RPCs offset market share loss in 2Q.

The company delivered a mixed performance in the quarter. While its market share contracted in both cash equities and options, it generated “impressive sequential increases” in RPCs. This was due to “positive mix shift to trades at the open and close in cash equities and the loss of a major customer who enjoyed significant volume discounts in options,” analyst Ashley Serrao said.

Serrao expects the loss in market share to “hurt” market data revenues. Moreover, compensation expenses are expected to be “seasonally higher.” The EPS estimates for 2Q and 2015 have been reduced from $0.81 to $0.79 and from $3.27 to $3.26, respectively.

The recent sell-off has created a “buying opportunity,” Serrao added.

In the report Credit Suisse noted the factors that are expected to drive “the next leg of the story:”

1. “A re-rating of a cash flow rich franchise (~7% FCF yield) as non-transaction businesses continue to grow organically (index, tech solutions) and via exertion of pricing power (listings, market data);
2. Expense-driven operating leverage from technology solutions as the segment reaches 17-20% operating margins over time and further firm-wide efficiencies (a hallmark of the firm's approach to expenses);
3. Continued buybacks (the stock is still below the $55 SOTP analysis laid out at investor day last year–we estimate the updated value to be $63) and, over time, acquisitions made with a laser focus on ROIC thresholds.”