All in all, Intercontinental Exchange (ICE -0.88%) had a decent first quarter, the details of which were unveiled by the company on Thursday. Investors promptly traded the stock down, but I feel this has less to do with the securities exchange operator's quarterly fundamentals and more to do with an acquisition it announced the day before those figures were published.
A NYSE quarterly performance
Impressively for such a well-established business -- Intercontinental Exchange owns the hallowed New York Stock Exchange (NYSE), among other, similar assets -- the company always finds a way to grow its business. In the first quarter, it managed to lift net revenue by 6% year over year to $1.9 billion. That was ever-so-slightly above the average analyst estimate of $1.89 billion for the period.
On the bottom line, the consistently profitable company yet again landed in the black. Matching revenue growth, adjusted net income advanced at a 6% pace to $804 million. Note that this shakes out to a net margin of 42%. As it's a provider of services and its costs are relatively low, margins tend to be high -- although they usually end up lower, in the 20%- and 30%-plus range.
Intercontinental Exchange, a frequent payer and once-per-year raiser of quarterly dividends, also declared its latest such payout. On June 30, the company will dispense $0.38 per share to investors of record as of June 15. At the most recent closing stock price, that yields 1.5%.
Jousting with a big asset buy
The company's finances are going to take a hit no matter what, though, because of the aforementioned acquisition. What's being acquired is Black Knight (BKI), a somewhat under-the-radar fintech that offers real estate financing and analytics services.
Publicly traded companies don't come cheap these days, and so it is with Black Knight. Intercontinental Exchange's deal for the fintech is valued at over $13 billion, most of which ($10.5 billion) is to be paid in cash, with the remainder being settled in the acquirer's stock.
Intercontinental Exchange is financing the cash portion of the purchase with a blend of freshly issued debt and cash on hand. As of March 31, it had $638 million in cash and equivalents on its books and $12.4 billion in long-term borrowings. So that incoming debt load is going to have quite the effect on the balance sheet -- no wonder investors are cooling on the stock.
Yet the company seems to be able to source debt financing relatively cheaply. Its quarterly interest expense is running a bit north of $100 million these days.
Even if that level more or less doubles, Intercontinental Exchange's free cash flow is robust -- over the past four quarters, it's averaged nearly $728 million. The company, then, should continue to have enough dosh for interest payments, debt retirement, and dividend payments.
Meanwhile it's acquiring an asset that, as it says, "complements and strengthens ICE's rapidly growing mortgage technology business."
In other words, an already powerful company is bulking up in an area where it's still a fairly new player. Given how well Intercontinental Exchange has managed its core business, I'd have every confidence it can scale up its real estate financing operations quickly and successfully. It's likely the hefty Black Knight price tag will continue to ding the stock price, but to me that presents a tempting buy opportunity for investors.