Intercontinental Exchange Earnings: Impressive Energy Futures Growth Supports Firm-Wide Results

Wide-moat-rated Intercontinental Exchange ICE reported decent third-quarter earnings that were in line with our expectations. Net revenue increased 9% from last year and 6% from last quarter to $2 billion. Meanwhile, operating income fell 7% to $845 million, mostly due to $155 million in integration costs from the closing of the Black Knight acquisition. As we incorporate these results, we do not plan to materially alter our $137 fair value estimate for Intercontinental Exchange. We see the shares as undervalued at current prices.

Intercontinental’s exchange segment grew 11% from last year to $1.1 billion. The increase in revenue was primarily driven by continued strength in the firm’s energy futures, with revenue increasing 45% to $384 million. Some year-over-year growth in energy futures can be explained by a recovery in global natural gas volume, which was disrupted last year by extreme volatility in the European market. However, even accounting for this, ICE’s gas futures have been a major source of long-term growth, with natural gas and environmental futures volume growing at a 17% CAGR over the last five years. We generally caution against reading too deeply into trading revenue growth since volume can vary significantly from quarter to quarter based on market conditions, but ICE is benefiting from long-term shifts in global energy markets.

On the other hand, the firm’s mortgage technology business continues to face difficult market conditions. High mortgage rates have caused a severe decline in origination volume, which is affecting the firm’s per-mortgage transaction fees and putting pressure on its customer base. The segment’s revenue decreased 7% pro forma for the Black Knight acquisition. Pro forma, the segment’s recurring revenue was flat at $235 million, while transactional revenue decreased 23%. That said, the company does continue to outperform the broader industry and we see secular strength in the firm’s position as it continues to sign new clients.