Is the Nasdaq OMX a Good Buy?

A few years ago it seemed that all we heard about from stock market pundits were the exchanges and how they were literally printing presses for money. They were the gate keepers at the toll booths of trading, taking a small cut every time a trade matched. As trading volume increased, and platforms became more efficient, the ability to generate steady and growing profits seem limitless. And then of course, the market sold off, trading patterns and hot products changed, and the stock prices of the exchanges corrected.

As the charts of the Nasdaq OMX (NDAQ) and NYSE Euronext (NYX) show (Source: StockCharts.com), it has been a difficult two months for the stocks of the exchanges. The drop in prices has been severe enough that many of the stock pickers that seemed to continuously pump the exchanges, even through the current downturn, have recently found themselves throwing up their hands and admitting defeat.

This week Barron's has an article that is taking a different approach, laying out an argument why one exchange in particular, the Nasdaq OMX (NDAQ), may be a good buy. With estimates of $2.50 a share in earnings (a little on the high side from consensus estimates), a 25 multiple would value the company at $62.50 a share. Why use a 25 multiple? Both Visa (V) and MasterCard (MA) tend to be given 25 multiples, and when you get right down to it, Nasdaq OMX is a transaction processor without credit risk, similar to Visa and Mastercard. Beyond financial estimates, another reason for considering Nasdaq OMX involves the benefits they are seeing from their recent acquisitions which have helped to diversify their businesses, as well as provide a global presence. Revenue is nicely spread out between global issues (20%), market data (19%), derivatives (17%), U.S. equities (15%), Nordic equities - OMX merger (9%), market tech (8%), and other (12%).

It really is astounding to think that only 15% of Nasdaq OMX revenues now comes from U.S. equity trading. If you believe that global markets will continue to boom due to the increased levels of global capitalism and subsequent flows of capital worldwide, then Nasdaq OMX may be well positioned to take advantage of this growth. In addition to global growth, Nasdaq OMX is also increasing their exposure to the higher margin derivative business, now at 17% of revenues, and expected to increase.

While the story is intriguing, buying Nasdaq OMX at this point in time may require a little leap of short-term faith, given that you are picking a bottom in the stock after the recent correction, even though the Barron's article should provide some near-term support and buying pressure. Nonetheless, at $23.70, the stock is obviously well off its recent highs, and unlikely to hit its 2003-2005 lows under $10 per share given the current diversified revenue stream (unless the current market meltdown continues and spreads - not totally out of the question). While the stock could be poised for a rebound, and again will most likely get some type of Barron's bounce or support, it may be safer to wait for additional market clarity. This is not to say that the stock will not rally from here, it very well may (I have been burnt betting with and against the Barron's rush before), but it needs to remembered that the stock has been a "good buy" all the way down from $50. It may be worth a few points to wait for a retest of the support that was recently broken to see if stock can hold up without the Barron's bounce. While the Barron's article may provide the catalyst needed to push the stock price back through previous support (now resistance), whether or not it holds will depend on more than another trader or article discussing how the stock continues to be a good buy.

Comments

[Ustaknow]

An aboslute waste of time reading you musing about the article. You may be brilliant, but you lack the ability to make a short and concise point. I compare your comments about the Barrons article to a Chinese fortune cookie in that all I got out of it is " You may want to wait"
What an absolute non effect!

[Paul Price]

Even mentioning the 2005 low of 'under $10/share" without noting that EPS that year were $0.57 versus excepted 2008 EPS of $1.79 says you don't have any idea of fundamental valautions.

The same multiple on today's earnings would lead to at least a low $30's share price today- well above current quotes.

Even an 18 - 20 P/E on next year's estimates makes for a $40 - $50 minimum goal by year-end 2009.

[LoveShorting]

David: I liked your article. Sure, I prefer shorter offerings but this is exactly what I look for on SA - - opinions outside (and even about) the mainstream press. Not everyone knows about the Barrons effect
(many do but this helps new traders) Please keep writing.

[knockreigh]

Very wishy-washy article-did not say anything relevant-time to buy is now.

[Goofey]

Good food for thought. Long ideas are meant to be that I would think. IDEAS.