Majestic Research

Bloomberg News

After 213 Years, NYSE Transforms

Published: March 07, 2006

The New York Stock Exchange, the world’s biggest stock market, makes its trading debut this week as the most expensive of the world’s publicly traded bourses. The success of counterparts around the world helps explain why.

NYSE Group Inc.’s stock begins trading tomorrow amid a global rally for shares of securities exchanges that’s in its fourth year. The stock is priced at 37 times NYSE’s projected earnings for next year.

Shares of Deutsche Boerse AG, Europe’s largest exchange by market value, have risen 19 percent this year. Hong Kong Exchanges & Clearing Ltd., the biggest in Asia, is up 27 percent.

The industry is benefiting from rising markets, increased share volume and the ability to charge higher prices, analysts say. The NYSE forecasts that its earnings next year will be four times higher than last year.

“The stocks are certainly more expensive than they were a year ago,” said Doug Atkin, chief executive of New York-based Majestic Research and former head of Instinet, an electronic stock market. “People are piling into this space, but I think that if you look at the benchmarks around the world, these are great businesses.”

The FTSE/Mondo Visione Exchanges index, which tracks shares of 16 exchanges around the world, more than tripled from the end of 2002 through 2005. The index has gained 23 percent this year, compared with a 4.3 percent gain for Morgan Stanley Capital International’s World Index.

The Big Board’s valuation is almost twice that of Frankfurt-based Deutsche Boerse and higher than Hong Kong Exchanges, which fetches 28 times its 2007 earnings.

NYSE Group is too expensive for some investors, given that the company faces rising competition from the Nasdaq Stock Market Inc. and the challenge of integrating Archipelago.

“The valuation reflects very high expectations with little room for error,” said hedge fund manager Alan Fournier, whose Chatham, N.J.-based Pennant Capital Management Llc has $1 billion in assets. Majestic Research’s Atkin, while bullish on the exchange industry, says he’s not recommending NYSE shares on concern that the company faces mounting competition from Nasdaq.

The NYSE plans to complete its purchase today of Archipelago Holdings Inc., a Chicago-based electronic market founded in 1996.

The NYSE will end 213 years as a member-owned institution and become a for-profit company with a market value of $10.8 billion. The Big Board’s 1,366 members and Archipelago shareholders have already benefited.

Shares of Archipelago, which will be exchanged for those of NYSE Group on a one-for-one basis, have surged threefold since the takeover was announced April 20. Each NYSE member will receive about $5.79 million in cash and stock of the combined company. NYSE memberships cost $1.05 million at the end of 2004.