NYSE shares debut at rich price to exchange rivals

Wednesday March 8, 5:34 pm ET

By Joseph A. Giannone

NEW YORK (Reuters) - NYSE Group Inc.'s (NYSE:NYX - News) strong market debut on Wednesday has some analysts questioning whether the brand new shares are already expensive compared to other publicly traded exchanges.

Shares in NYSE Group, owner of the New York Stock Exchange, surged 23 percent as the 213-year-old exchange went public, reflecting investor enthusiasm for the Big Board's dominant position and interest in the booming exchange sector.

At $80.00 for each of its 158 million shares, the NYSE has a market value of about $12.6 billion -- up $2.6 billion since shares of its predecessor stock from merger partner Archipelago Holdings Inc. last traded on Tuesday.

Investors had driven Archipelago shares up over 368 percent from $16.90 since its merger with the world's largest stock exchange was announced last April.

According to its merger proxy, NYSE Group expects earnings of $194.3 million on $1.55 billion in revenue this year and $302.0 million earnings on $1.66 billion revenue in 2007. On that basis the shares trade at 65 times this year's earnings and 42 times next year's profit.

That's a hefty premium to the valuations afforded by other newly listed exchanges, including the Chicago Board of Trade (NYSE:BOT - News), Intercontinental Exchange (NYSE:ICE - News), the International Securities Exchange (NYSE:ISE - News) and the Chicago Mercantile Exchange

The London Stock Exchange (London:LSE.L - News) fetches 38 times its expected normalized 2006 earnings, according to Reuters Estimates. Only Nasdaq Stock Market (NasdaqNM:NDAQ - News), which trades at 61 times forward earnings, is in the same valuation league.

Yet analysts and traders said the red carpet treatment for NYSE is not surprising.

The conversion of the world's major exchanges in the last few years has created a whole new sector for investors, said Hamid Biglari, global head for financial institutions at Citigroup.

It's also a sector that is evolving rapidly, undergoing consolidation, with the NYSE in a strong position to benefit.

"The NYSE has a premium brand, one of the best known globally -- and companies that have premium brands trade at a premium to their sector," Biglari said. "It's not surprising there would be a lot of demand."

Still, a long list of questions surround NYSE's future direction and the potential impact of evolving market technology and regulation on its business. The exchange is converting to a hybrid electronic and human model and there's uncertainty how well it will make the transition.

Sandler, O'Neill & Partners analyst Richard Repetto -- the only sellside analyst covering NYSE Group -- rates the stock "sell" and has a $48 price target, citing "many issues" that need to be addressed. Repetto estimates the NYSE will earn $1.28 a share, up 34 percent this year.

NYSE Chief Executive John Thain said the company would not be releasing earnings forecasts.

Repetto attributed the strong opening day move to demand from small investors flocking to the debut as if it were an IPO, rather than just a ticker change. The market will get a better picture of the company when it executes a secondary stock offering.

"It was thinly traded yesterday, they haven't even given the shares to the members yet and the members are locked up," Repetto said. "I believe that the real fundamentals of the stock will drive the valuation going forth."

Francis Gaskins, who tracks new offerings as head of Los Angeles-based IPO-Desktop.com, estimates NYSE stock trades at 110 times 2005 earnings and at about 9 times the two companies' combined book value.

That's expensive relative to 54 times earnings at Nasdaq Stock Market, IntercontinentalExchange's 86 times earnings and 49 times earnings for Chicago Mercantile Exchange, said Gaskins -- but justifiable.

"The NYSE is the leader in its segment and of all the companies it is in a better position to expand into their rivals' space," said Gaskins.

Citigroup's Biglari likewise said NYSE Group will make itself more valuable just by converting to a public company.

"As many companies demutualized and get exposed to the discipline of market forces, there is tremendous opportunity for efficiencies," Biglari said, an effect already seen at the other newly listed exchanges.

The NYSE's internal projections assume $105 million in new revenue through 2007 from transaction pricing, trading licenses, regulatory revenue and new floor and facility fees. Expenses are expected to fall $130 million on reduced professional services, job cuts and savings at its SIAC unit.

For now, though, investors appear only to be interested in owning a piece of this iconic center of capitalism.

"It's simply not trading on fundamentals," said Jamie Selway, managing director at White Cap Trading. "I would think that most professional investors are waiting for details that will be part of the roadshow for the secondary."