The past year has been tumultuous for most of the players in the financial sector. Bank stocks were hit early in the COVID-19 pandemic over fears the ensuing recession could lead to massive credit write-downs. Shares of real estate investment trusts (REITs) have also sank amid fears that tenants will not be able to pay rent.
However, a group of companies in the sector did not suffer in 2020: stock market operators such asIntercontinental exchange (NYSE: ICE). The turmoil has meant more business for institutions such as the New York Stock Exchange (NYSE), the largest portfolio of Intercontinental Exchange. Overall, the company saw 16% revenue and profit growth last year.
But stock market volatility will fluctuate, which is why Intercontinental Exchange has diversified its business portfolio towards mortgages and increased its presence in the energy markets. While neither of the two segments has the NYSE name value, both are worth watching for the impact they may have on Intercontinental Exchange fortunes.
Major changes in mortgage origination activity
Mortgage technology is becoming a major driver of Intercontinental Exchange growth. The company strengthened its presence in the mortgage industry last year by acquiring Ellie Mae, a software provider that helps mortgage originators manage the loan production process. The Mortgage Technology segment of Intercontinental Exchange also includes the Electronic Mortgage Registration System (MERS) – a centralized system for recording mortgage loan management data and beneficial ownership of loans secured by residential real estate. – and Simplifile, which streamlines the closing process.
This segment’s revenue increased 324% to $ 595 million in 2020, and its operating profit rose 124% to $ 152 million. These jumps were mainly due to the addition of Ellie Mae. However, on a pro forma basis, revenues increased another 56%. This is the real growth rate from apples to apples. Pro-forma revenues are said to have reached $ 1.2 billion.
Intercontinental Exchange is benefiting from a major shift in the mortgage industry – its conversion from analog and labor-intensive to digital and more automated. As their compliance and regulatory costs have risen, mortgage originators are under intense pressure to cut costs and increase production. Mortgage technologies like Encompass (Ellie Mae) and Simplifile directly address these needs. Intercontinental Exchange estimates that the total addressable market for its offerings in this area is around $ 10 billion, giving it significant growth potential.
If inflation returns, energy trade should benefit
Energy trading has been another area of growth for Intercontinental Exchange. A key product of the company is the Brent Oil Contract, which is one of the biggest benchmarks in the energy sector. It is based on North Sea Brent prices and is the main contract used overseas. Intercontinental Exchange is also active in facilitating the trade of natural gas, liquefied natural gas and all kinds of refined spreads. Finally, ICE has the Environmental Exchange, which allows individuals and companies to exchange carbon contracts to cover climate and regulatory risks.
Over the past year, revenue from energy trading increased 13% to $ 1.1 billion. Total volumes increased by 15%. Natural gas volumes grew 22% in 2020 due to higher demand and lower production of shale oil. Intercontinental Exchange is also launching ICE Futures Abu Dhabi, a partnership with Abu Dhabi’s national oil company and nine other energy trading companies. The new exchange will include futures on Asian crude benchmarks as well as other spread-based contracts with other energy benchmarks.
While the New York Stock Exchange’s spot equity trading income will continue to be the main source of income for the Intercontinental Exchange, mortgage and energy activities will be the main drivers of its growth, particularly if inflationary pressures attract more money to the energy markets.
Intercontinental Exchange is trading at 23 times the expected earnings per share for 2021, which is a reasonable price considering it has a portfolio of assets that would be difficult to replicate. The company’s $ 0.30 quarterly dividend is about 27% of last year’s earnings per share, which is a pretty good payout ratio.
Investors worried about the prospects of further market volatility may find that a company that would benefit from it is a good addition to their portfolio.
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