Are Shares of Exchanges Becoming Too Expensive?
By David Wilson
Jan. 23 (Bloomberg) -- At what price will the shares of publicly traded stock and commodity exchanges worldwide become too expensive to attract investors?
The question is becoming more pertinent. The industry has rallied more than global stock markets since 2003 as exchanges have become busier. Takeovers are fueling gains this year.
The FTSE/MV Exchanges Index, consisting of 19 markets, has risen 9.3 percent since the year began. Bursa Malaysia Bhd., the best performer, has jumped 33 percent.
During the past four years, the index has soared more than sixfold. The surge far exceeds the 90 percent advance in Morgan Stanley Capital International's World Index for the same period.
Every company in the exchange index has risen this year except for International Securities Exchange Inc., the second- largest U.S. options market. The ISE's shares have dropped 4.5 percent and are still about two-and-a-half times more costly than they were when the market went public in March 2005.
Price-earnings ratios for the group are high by global standards. The cheapest stock in the FTSE/MV index -- OMX AB, the owner of seven exchanges in the Nordic and Baltic regions -- is valued at 20.6 times earnings, according to data compiled by Bloomberg. The ratio for the MSCI World is 17.5 times.
Exchanges are benefiting from increased trading as a bull market bolsters demand for stocks. Last year's daily average on the New York Stock Exchange amounted to 1.61 billion shares, an 18 percent increase from 2003, Bloomberg data shows.
Industry Dealmaking
The growing popularity of derivatives -- contracts tied to the value of stocks, bonds, loans, currencies and commodities -- has also helped. Average daily trading on the Chicago Mercantile Exchange, the largest U.S. futures market, rose 28 percent last year. Eurex, the world's biggest, had a 22 percent increase.
The CME wants to get bigger by buying the Chicago Board of Trade, its traditional competitor, for stock valued at about $9 billion. More deals are rippling through the industry as well.
NYSE Group Inc., owner of the New York Stock Exchange, is close to buying Euronext NV. Nasdaq Stock Market Inc. has its sights set on London Stock Exchange Group Plc, which is stepping up share repurchases in an effort to stay independent.
Rising share prices are giving exchanges a more valuable currency -- their own stock -- for making offers. NYSE Group, for instance, ended last week at 61.5 times analysts' average profit estimate for 2006, its first year as a public company.
Increasing Risks
At the same time, the surge increases the risks if the takeover wave ends or the global stock-market rally falters. It's difficult to judge how much because the industry hasn't historically been a hotbed for dealmaking and most exchanges weren't public during the bear market of 2000-2002.
Yet the group's performance as markets slumped in May and June may be instructive. The FTSE/MV index declined 21 percent, exceeding the 12 percent loss in the MSCI World and approaching the 25 percent drop in MSCI's Emerging Markets Index.
The exchange index has surged 67 percent, much more than either benchmark, since then. So we're much closer to finding out what prices are too high.
(David Wilson is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: David Wilson in New York at dwilson@bloomberg.net
Last Updated: January 23, 2007 00:11 EST |
