Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – April 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Intercontinental Exchange Inc. (ICE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Intercontinental Exchange Inc, formerly IntercontinentalExchange Group, Inc., is a network of regulated exchanges and clearing houses for financial and commodity markets. The Company delivers transparent and accessible data, technology and risk management services to markets around the world through its portfolio of exchanges, including the New York Stock Exchange, ICE Futures, Liffe and Euronext. In February 2014, the Company completed the acquisition of Singapore Mercantile Exchange. In July 2014, Intercontinental Exchange Inc sold its Wombat Financial Software, a unit of NYSE Technologies. Effective September 10, 2014, Intercontinental Exchange Inc acquired an undisclosed majority interest in Holland Clearing House NV.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $238.24 |
| MG Value | $186.80 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $116.16 |
| Value Based on 0% Growth | $68.10 |
| Market Implied Growth Rate | 10.62% |
| Net Current Asset Value (NCAV) | -$50.40 |
| PEmg | 29.74 |
| Current Ratio | 0.99 |
| PB Ratio | 2.17 |
Balance Sheet – February 2015
| Current Assets | $48,486,000,000 |
| Current Liabilities | $48,798,000,000 |
| Total Debt | $2,247,000,000 |
| Total Assets | $66,428,000,000 |
| Intangible Assets | $16,228,000,000 |
| Total Liabilities | $54,131,000,000 |
| Outstanding Shares | 112,000,000 |
Earnings Per Share
| 2015 (estimate) | $10.88 |
| 2014 | $8.55 |
| 2013 | $3.21 |
| 2012 | $7.52 |
| 2011 | $6.90 |
| 2010 | $5.35 |
| 2009 | $4.27 |
| 2008 | $4.17 |
| 2007 | $3.39 |
| 2006 | $2.40 |
| 2005 | -$0.39 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $8.01 |
| 2014 | $6.49 |
| 2013 | $5.45 |
| 2012 | $6.26 |
| 2011 | $5.36 |
| 2010 | $4.37 |
Dividend History
Conclusion:
Intercontinental Exchange Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, short dividend history, and the poor PEmg ratio.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $5.36 in 2011 to $8.01 for 2015.  This level of growth does not support the market’s implied estimate of 10.62% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Intercontinental Exchange Inc. (ICE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Intercontinental Exchange Inc. (ICE) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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