Nymex Hits a Gusher

NymexHoldings (NYSE: NMX  ) , a top commodities exchange, may be 134 years old, but the company looked like a dot-com last week. On its IPO, the stock price skyrocketed from $59 to $132.99 (the stock was as high as $152). No doubt, there are good reasons for the excitement; that is, the company is growing at a rapid clip and exchange IPOs have done quite well over the past few years. However, the fact remains that Nymex is selling at frothy levels.

Basically, Nymex (which stands for the New York Mercantile Exchange) dominates the market for listed energy and options contracts (over 60% of the global market). And the firm has a broad platform: a physical trading floor, clearing and settlement services, and an electronic trading system. It even licenses market data, to boot.

For the first nine months of 2006, there were 175.9 million contracts traded with the Nymex, which is up from 160.1 million traded in the same period a year ago. During this time, revenues increased from $253 million to $382 million, while profits increased from $50 million to $112 million.

Then again, Nymex's management team has definitely been savvy. For example, its ownership of a clearinghouse has been a key differentiator. Actually, all futures exchanges require a clearinghouse that settles transactions, making sure payments are made and obligations are met. As a result, this increases the confidence of traders to conduct business on an exchange.

By owning a clearinghouse and having visibility in what traders are doing, Nymex has an easier time launching new products. Also, the process of integrating new products is more seamless since the Nymex controls the clearing infrastructure.

In fact, since 2005, the firm has introduced 151 new products. Some of these products cover new categories, such as different blends of crude oil, sulfur dioxide, coal, and nitrous oxide. There are also new products that help traders better manage risks, which are fairly complex and have exotic names like basis swaps, swing swaps, and so on.

Nymex has also entered into a variety of alliances. There is its deal with the Chicago Mercantile Exchange Holdings (NYSE: CME  ) , which allows for improved electronic trading. What's more, there have been deals to enter new markets, such as Russia, Mexico, and Japan.

But, of course, Nymex faces some major risks. First, there is serious competition, such as from the InterContinental Exchange (NYSE: ICE  ) , which went public last year.

However, perhaps the biggest risk is its dependence on the energy markets. In fact, with lower oil prices, there has already been some weakness. And, if this continues for several quarters, it could mean lackluster results -- especially when compared to the stellar performance in 2006.

Besides, Nymex's market cap is a nose-bleed $12 billion, which is about 12 times trailing revenues. And with only 6.5 million shares outstanding, it does not take much to swing the stock price. In other words, this is really a stock for traders, not long-term investors.

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 41 out of 13,432 in CAPS.


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