Majestic Research

Bloomberg News

Around the Markets: NYSE Joins a Party in Full Swing

By Edgar Ortega
Published: March 06, 2006

The New York Stock Exchange, the world’s biggest stock market, makes its debut this week as the most expensive of the world’s publicly traded bourses, and it has the success of it counterparts around the world to thank.

NYSE Group’s stock will begin trading Wednesday amid a global rally for shares of securities exchanges that is in its fourth year. In the lead are shares of Deutsche Börse, Europe’s largest exchange by market value, which have risen 19 percent this year, and shares of Hong Kong Exchanges & Clearing, the biggest in Asia, up 27 percent.

The industry is benefiting from rising markets, increased share volume and the ability to charge higher prices, analysts say. 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 Majestic Research, based in New York, 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, 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 the Morgan Stanley Capital International world index.

But NYSE shares do not come cheap. The stock is priced at 37 times the exchange’s projected earnings for next year, which are almost twice the projected earnings of Deutsche Börse, based in Frankfurt, and higher than those of the Hong Kong exchange, which brings 28 times its estimated 2007 earnings.

NYSE is too expensive for some investors, given rising competition from the Nasdaq and the hurdles the exchange faces with the integration of Archipelago, the Chicago- based electronic market.

“The valuation reflects very high expectations with little room for error,” said Alan Fournier at Pennant Capital Management.

Atkin, of Majestic Research, said that while he was bullish on the exchange industry, he was not recommending NYSE shares because of concern that the company faces mounting competition from Nasdaq.

The Big Board, which is ending 213 years as a member-owned institution and becoming a for-profit company with a market value of $10.8 billion, plans to complete its purchase of Archipelago Holdings on Tuesday.

The Archipelago deal will extend NYSE’s reach into options trading and allow it to handle about one of every two shares traded on U.S. equity markets.

The exchange, whose market value ranks third behind those of its rivals Chicago Mercantile Exchange Holdings and Deutsche Börse, predicted in a regulatory filing in November that net income in 2007 would be $293.6 million, up from $57.1 million in 2005 for the combined company. The 2005 results included $72.3 million in merger-related costs.

“There will be wide demand for the stock,” said Thomas Caldwell, chairman of Caldwell Securities, which is based in Toronto and will own about 3.9 million NYSE Group shares.

Other newly public U.S. exchanges have surged recently as well. CBOT Holdings, parent of the Chicago Board of Trade futures market, has doubled since its initial public offering in October. The Board of Trade reported an 82 percent increase in net income last year after it raised prices and increased trading.

Revenue at NYSE may increase along with trading as it introduces electronic systems that can execute trades faster, according to Caldwell. The daily average number of shares that change hands at the exchange may reach five billion by 2010, up from 1.61 billion in 2005, he said.

“The share price performance of exchanges will continue as long as volumes rise and consolidation is a possibility as it is now,” said Mamoun Tazi, an analyst at Man Securities in London who covers European exchanges. “The NYSE’s timing is good.”