The Zacks Securities and Exchanges industry comprises companies that operate physical or electronic marketplaces, which facilitate the buying and selling of stocks, stock options, bonds or commodity contracts.
These companies generate revenues from the fees received from the listed companies on their exchanges. Industry players also provide a range of data and listing services to global financial and commodity markets, including pricing and reference data, exchange data, analytics, feeds, index services, desktops and connectivity solutions as well as corporate and ETF listing services on the company’s cash equity exchanges.
Here are the industry’s three major themes.
- Diverse product offerings and trading volatility remain primary growth catalysts. Demand is boosted by investors’ optimism and interest of corporates to access public capital. The industry’s product innovation efforts have been helping it better cater to the derivatives industry’s demands and complement its core product lines. This, in turn, has been aiding key industry players to strengthen their market position and global reach.
- The players in the Securities and Exchanges industry are largely dependent on product and service portfolios for revenues. Major services include trade execution, clearing, settlement services for securities and commodity contracts, listing services plus trading and clearing systems services. Other revenue sources include data products, financial indexes along with information and public company services. Maximization of transaction and clearing fees and lowering of transaction-based expenses drive profits. Sustainable trading volume growth drives transaction and clearing fees (a major component of the top line of industry players). Per a report from global business intelligence leader IBISWorld, revenues are estimated to be about $16 billion in 2019 with annual growth rate (2014-2019) of 5.3%.
- Focus on building a strategic economic market model via technological advancements and upgrade of products and services will help all exchanges to stay afloat amid changing industry dynamics. Additionally, strategic buyouts have led to a diversified product portfolio and help industry participants to maintain their domestic market share as well as fortify global footprint.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Securities and Exchanges industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #9, which places it in the top 4% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, reflects favorable near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have been gaining confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for the current year has moved up 2.2% in six months’ time.
Before we present a few securities and exchanges stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Zacks Securities and Exchanges industry has outperformed the Zacks S&P 500 composite and the broader Zacks Finance sector over the past year. The industry has rallied 17.7% compared with the S&P 500’s rise of 11.2% and the broader sector’s increase of 5.3% in the said time frame.
Industry’s Current Valuation
On the basis of trailing 12-month price-to-book (P/B), which is commonly used for valuing finance stocks, the industry is currently trading at 3.24X compared with the S&P 500’s 4.15X and the sector’s 2.75X.
Over the last five years, the industry has traded as high as 3.48X, as low as 1.7X and at the median of 2.42X as the chart below shows.
Price-to-Book (P/B) Ratio (TTM)
Price-to-Book (P/B) Ratio (TTM)
Expansion of product portfolio is likely to drive the performance of industry players. Increase in trading volumes and product expansion through prudent acquisitions are expected to provide a cushion as well. Low reliance on debt is an added advantage.
However, alterations in investment patterns and priorities, intense competition with the wave of mergers and acquisitions in the stock exchange industry and compliance with regulations pose challenges.
The Zacks Securities and Exchanges space currently has just one stock sporting a Zacks Rank #1 (Strong Buy) and three stocks carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
MarketAxess Holdings Inc. (MKTX - Free Report) : This New York-domiciled leading multi-dealer trading platform offers institutional investors access to global liquidity in products like U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit derivatives and other fixed-income securities. It sports Zacks Rank #1. The Zacks Consensus Estimate for 2019 EPS indicates year-over-year rise of 2.5% and 1.6% increase for 2020. It came up with average four-quarter positive surprise of 1.45%.
Price and Consensus: MKTX
Nasdaq, Inc. (NDAQ - Free Report) : This New York-based leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 and 2020 EPS indicates year-over-year improvement of 1% and 0.6%, respectively. The company has an expected long-term earnings growth rate of 7.1%. The average four-quarter positive surprise is 2.94%.
Price and Consensus: NDAQ
CME Group Inc. (CME - Free Report) : This Zacks Rank #2 largest futures exchange in the world in terms of trading volume as well as notional value traded is based in Chicago, IL. The Zacks Consensus Estimate for 2019 EPS indicates year-over-year increase of 1.3%. The company’s projected long-term earnings growth rate is 7.4%. It pulled off average positive surprise of 2.88% in the preceding four reported quarters.
Price and Consensus: CME
Intercontinental Exchange Inc. (ICE - Free Report) : The Zacks Consensus Estimate for 2019 and 2020 EPS of this Atlanta, GA, leading global operator of regulated exchanges, clearing houses and listings venues, and a provider of data services for commodity, financial, fixed income and equity markets indicates a year-over-year rise of 1.1% and 0.5%, respectively. The company’s long-term earnings are projected to grow at a rate of 8.3%. It pulled off average positive surprise of 4.82% in the preceding four reported quarters.
Price and Consensus: ICE