Majestic Research

Bloomberg News

NYSE Shares not for Bargain Hunters: Bourse's Stock to Launch Tomorrow

By Edgar Ortega
Published: March 07, 2006

NEW YORK—The New York Stock Exchange, the world’s biggest stock market, makes its trading debut tomorrow 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 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 per cent this year. Hong Kong Exchanges & Clearing Ltd., the biggest in Asia, is up 27 per cent. 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 officer 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 FT-SE/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 per cent this year, compared with a 4.3-per-cent gain for Morgan Stanley Capital International’s World index.

NYSE Group is too expensive for some investors, given that the company faces rising competition from Nasdaq Stock Market Inc. and the challenge of integrating Archipelago Holdings Inc., a Chicago-based electronic market founded in 1996.

The NYSE plans to complete its purchase of Archipelago tomorrow.

“The valuation reflects very high expectations with little room for error,” said hedge fund manager Alan Fournier of New Jersey-based Pennant Capital Management LLC.

Majestic Research’s Mr. Atkin is bullish on the exchange industry, but says he’s not recommending NYSE shares because of concerns that the company faces mounting competition from Nasdaq.

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 (U.S.), ranking third in size behind Chicago Mercantile Exchange Holdings Inc. and Deutsche Boerse.

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 a total of about $5.79-million in cash and stock of the combined company. NYSE memberships cost $1.05-million at the end of 2004.

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

The NYSE predicted in a November regulatory filing that profit in 2007 will be $293.6-million, up from a total of $57.1-million in 2005 for the combined company.

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

There’s money in the markets

As the New York Stock Exchange shares begin trading tomorrow, a look at other markets that went public shows there’s money to be made by investing in exchanges.

CBOT Holdings Inc.
IPO date: Oct. 18, 2005
Return since IPO: 130%
CBOT operates the Chicago Board of Trade, a market for futures and options, via electronic trades and open auctions.
DAILY CLOSE, (BOT - NYSE)
Yesterday’s close: $124.90 U.S., up $1.23
Chicago Mercantile Exchange Holdings Inc.
IPO date: Dec. 5, 2002
Return since IPO: 1,123%
CME was formed in 1898 and trades futures and options, electronically and on a trading floor.
DAILY CLOSE, (CME - NYSE)
Yesterday’s close: $428.19 U.S., down $6.06
Intercontinental Exchange Inc.
IPO date: Nov. 15, 2005
Return since IPO: 130%
ICE is an Atlanta-based electronic market for commodities, specializing in energy futures.
DAILY CLOSE, (ICE - NYSE)
Yesterday’s close: $61.31 U.S., up 71¢
Nasdaq Stock Market Inc.
IPO date: July 1, 2002
Return since IPO: 166%
Nasdaq bills itself as the world’s largest electronic market for stocks, with 3,300 listed companies.
DAILY CLOSE, (NDAQ - Q)
Yesterday’s close: $39.96 U.S., down 73¢
SOURCE: THOMSON DATASTREAM