Every day it seems like there is some news that moves the stock market significantly. Inflationary pressures, rapidly rising interest rates, uncertainty in energy markets, and geopolitical conflicts have contributed to volatility across all assets. As a result, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are all trading in bear market territory -- defined as a sustained 20%-plus drop from their peak levels.
Bear markets really challenge an investor's will. No one likes seeing their investments lose value. They are also an opportunity to buy stock in great companies at discounted prices. One beaten-down company with consistent earnings trading at its cheapest price tag in years is Intercontinental Exchange (ICE -0.09%). Here's why you should consider buying it today.
Its diverse business model is an excellent source of consistent revenue
Intercontinental Exchange provides a variety of services to investors in financial markets. The company operates 13 regulated exchanges globally, along with six clearing houses. On these exchanges, investors can trade in securities like commodities, interest rate products, equities, and exchange-traded funds (ETFs). It owns the New York Stock Exchange (NYSE), which is the trading platform for over 70% of the stocks in the S&P 500. About half of its revenue comes from the exchanges segment in the form of transaction fees from investors trading in its products and recurring fees it earns from companies listing their stock on the NYSE.
The company also operates a fixed income and data analytics segment, accounting for one-quarter of its revenue. Here, Intercontinental Exchange provides data on over 3 million fixed-income securities -- another good source of recurring revenue for the company.
Image source: Getty Images.
Finally, it has a mortgage technology segment that accounts for 20% of its total revenue. Here it offers an end-to-end platform to those in the residential mortgage market, automating much of the loan origination process. This is another stellar source of recurring revenue, as the company earns fees on this business through the software-as-a-service model.
Intercontinental Exchange's diversified business has helped it generate impressive growth figures over the last decade, with revenue growing at 21% annually and diluted earnings per share (EPS) growing at 15% annually.
Intercontinental Exchange stock hasn't been this cheap in over 10 years
Volatility this year has impacted almost every asset class, and Intercontinental Exchange is no exception. Since the start of 2022, the stock is down over 34%. From a valuation perspective, its price-to-earnings ratio (P/E) of 15 is the cheapest it's been since 2012.
ICE PE Ratio data by YCharts
Given the selling pressure on the stock, you may think the company has underperformed. That couldn't be further from the truth. In the first half of this year, Intercontinental Exchange has grown revenue by 6.7% and operating income by 10% from last year -- with growth coming from every segment.
|
Segment |
Revenue Through Six Months of 2022 |
Growth (YOY) |
|---|---|---|
|
Exchanges |
$2.09 billion |
11% |
|
Fixed Income and Data Services |
$1.02 billion |
10% |
|
Mortgage Technology |
$604 million |
13% |
Data source: Intercontinental Exchange 10-Q filing. YOY = Year over year.
Intercontinental Exchange has achieved solid growth thanks to its recurring revenue and growing business. The company pays out a solid dividend yield of 1.64% and should have no problem maintaining this, given its payout ratio of 23.7%.
This acquisition will boost its presence in the real estate market
Earlier this year, the company announced it would acquire Black Knight, a real estate data and analytics company, for $13 billion.
The move will strengthen its mortgage technology offering and complement its existing offerings in the real estate space. The deal involves mostly cash (over $10 billion), with the remainder settled in stock. Intercontinental Exchange is issuing debt to finance the deal -- which is the likely reason the stock price fell following its first-quarter earnings this year. The acquisition still needs regulatory approval, but the company expects the deal to close in early 2023.
While the deal increases the company's debt load, it will ultimately strengthen its end-to-end technology platform and help fix some inefficiencies in the residential mortgage market. While a slowing mortgage market could impact its earnings in this segment in the next few quarters, Intercontinental Exchange's cheap multiple and consistent revenues from its diverse offerings make this stock worth considering for long-term investors.
