Dec. 17 Stock Buy: Intercontinental Exchange Inc (ICE)

December 17, 2007 - Stock Recommendation: Intercontinental Exchange Inc (NYSE:ICE)


When the stock market is lacking direction and headlines knock the general market lower, stocks that buck the downtrend are potential new leaders to consider adding to your portfolio. They are buoyed even when the market is down. Find one with good fundamentals and reasons to buy, and you have stock that can outperform in a choppy market. One for you to examine more closely is Intercontinental Exchange Inc., ticker ICE (NYSE closed at $185.73 on 12/14). The stock rose $4.91 or up 2.72% on Friday when the DOW and S&P500 were down 1.32% and 1.37%, respectively.

[ICE operates an electronic futures and over-the-counter exchange for energy and agricultural commodities, and in January 2007 purchased the NYBOT to increase its presence.]

There was no major moves pushing ICE shares higher on Friday. Thursday evening the company announced they will move to an all-electronic futures trading platform, eliminating live outcry trading in the pits at the end of February. They may recognize some personnel cost savings from this move, but since most of the trades were already done electronically, it was not a major announcement. Long-term they might be able to reduce leased spaces for pits, but these are all under current leases that run several more years. The shares of ICE broke through their 52 week high on Friday, ushering in new territory for the stock.

Why the strong performance?

Intercontinental Exchange has been on a huge earnings upswing:

• 2005 EPS = $0.98
• 2006 EPS = $2.40
• 2007 EPS = $3.33 (Q4 estimates)
• 2008 EPS = $5.04 (estimates)

The stock sports a PE of 56 - towards the higher end of its PE range of 40-60 over the last year. But ICE has also been very successful at increasing its revenue each year as well, so the earnings increases have come from higher gross revenues, not just squeezing more profits out of same sales. These are what I call "good" earnings increases because revenue numbers are harder to manipulate than bottom line profits. These top line revenue numbers have also been impressive:

• 2005 - $156 Million
• 2006 - $314 Million
• 2007 - $570 Million (Q4 estimates)
• 2008 - $786 Million (estimates)

Intercontinental Exchange has been a strong recent stock, with a high Relative Strength and peer companies in the Financial Services Industry that have also been strong performers, companies like Chicago Mercantile Exchange Group (CME) and Mastercard (MA). The strong recent performance in 2007 of stocks such as these have put ICE on more institutions buying screens, and the stock has been strongly supported in recent months. Look to see continued sponsorship of the stock in the coming months.

The Fundamental Reason to Buy ICE

The underlying reason that I am bullish on Intercontinental Exchange Inc is that their core business surrounds futures and options trading on energy and agricultural commodities. The volatility in the energy sector has helped power the increased trading and volumes, driving ICE revenues up with them. As markets become more volatile, trades become much more active as producers and users hedge their own business interests and trader/investors try to make money in the volatility and trades. Energy prices will likely remain volatile, continuing to support the futures market trades that ICE operates.

The other primary commodities that ICE operates in is agricultural products. I believe these markets will become even more volatile in 2008, powering a higher move in ICE shares. The headlines through 2007 have supported this trend. Look at the major fertilizer companies (CF, MOS, POT) that have powered to new highs in 2007 due to the increasing demand for their products in the agricultural market. John Deere (DE) business is booming with record sales. Smart Money magazine just listed one of their major trends for 2008 as being increased demand for meat worldwide as the living standards improve, and corn and soybean crops as being major benefactors because of the feed requirements. Smart Money even listed Bunge (BG) - a play on grains, oilseeds, and fertilizers - as one of their stock picks for 2008, and John Deere too.

All of these moves plays into the core business of ICE as well. That's the play we're looking for in the stock. Generating more revenues from increased volatility in the commodities markets. Breaking into new 52-week highs and announcing all-electronic trading ahead of expectations are just timely bonuses for buying ICE at this level.

The overall market on Monday and Tuesday could be rocky from the inflation fears from Friday, but by Wednesday we should have that shaken out. You may want to look at ICE to see what direction it will take on Monday before taking your position, or buy in with only 1/4 to 1/2 of your target holding, adding shares on any weakness through mid-week.

As always, please feel free to let me know your thoughts and comments!