On Monday, Goldman Sachs made a notable adjustment to its rating on IntercontinentalExchange (NYSE:ICE), upgrading the stock from Neutral to Buy and setting a price target of $167.00. The firm's analysts project a 22% upside potential for the stock, citing several key factors expected to drive growth.
The financial institution anticipates IntercontinentalExchange's earnings per share (EPS) to experience an upward inflection, moving into low-teens growth by 2025 and beyond. This optimism is underpinned by three main elements.
Firstly, structural tailwinds and the company's dominant position in the global energy markets, which represent about 30% of its earnings, are predicted to contribute to over 25% revenue growth in 2024, with an estimated 8%-10% growth thereafter.
Secondly, the firm's Fixed Income Data & Analytics segment, accounting for approximately 22% of earnings, is showing signs of accelerating growth. The recovery of the firm's Annual Subscription Value (ASV) and year-to-date rebound in flows into fixed income funds are expected to bolster this segment.
Lastly, the Mortgage Tech sector, which makes up roughly 16% of earnings, is also anticipated to recover as origination activity stabilizes and IntercontinentalExchange’s organic initiatives begin to take shape. This is forecasted to lead to high single-digit to low double-digit revenue growth in the years 2025 and 2026.
Goldman Sachs predicts that the high incremental margin from the company's rapidly growing Exchange revenues will contribute to an approximate 100 basis points per year expansion in operating margins.
Additionally, a high free cash flow conversion is expected to facilitate a quicker pace of debt reduction and increased share repurchases by the end of 2024. The firm's projections place them slightly above consensus EPS estimates, with figures of $6.14, $6.90, and $7.88, as per Visible Alpha Consensus Data.
The analysts believe that as IntercontinentalExchange's top-line growth accelerates and the firm reduces its leverage, there is potential for the stock's valuation to improve from the current 21X next twelve months (NTM) price-to-earnings (P/E) ratio to greater than 22.5X. This implies a 16.5X enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio, which is in line with historical averages.
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