Why Intercontinental Exchange took a big hit after first-quarter results

Aall in all, Intercontinental exchange (NYSE: ICE) had a decent first quarter, details of which were disclosed by the company on Thursday. Investors quickly traded the stock lower, but I think that has less to do with the stock trader’s quarterly fundamentals than with an acquisition announced the day before these numbers were released.

A quarterly NYSE performance

Impressive for such an established company – Intercontinental Exchange owns, among other similar assets, the New York Stock Exchange (NYSE), the company is always finding a way to grow its business. In the first quarter, it managed to increase its net revenue by 6% year-over-year to $1.9 billion. That was slightly higher than the average analyst estimate of $1.89 billion for the period.

Image source: Getty Images.

In the end, the still profitable business once again landed in the black. Along with revenue growth, adjusted net income grew at a 6% pace to $804 million. Note that this translates into a net margin of 42%. Because it’s a service provider and its costs are relatively low, margins tend to be high, although they usually end up lower, in the range of 20% to 30% and more.

Intercontinental Exchange, a frequent payer and once-a-year quarterly dividend collector, also declared its last such payout. On June 30, the company will distribute $0.38 per share to investors of record as of June 15. At the most recent closing price, this yields 1.5%.

Jousting with a big trump buy

The company’s finances are going to suffer no matter what, because of the aforementioned acquisition. What is acquired is Black Knight (NYSE: BKI)a somewhat low-key fintech that offers real estate finance and analytics services.

Publicly traded companies don’t come cheap these days, and the same goes for Black Knight. Intercontinental Exchange’s fintech deal is valued at more than $13 billion, the bulk of which ($10.5 billion) is to be paid in cash, with the rest settled in shares of the acquirer.

Intercontinental Exchange finances the cash portion of the purchase with a mix of freshly issued debt and cash on hand. As of March 31, it had $638 million in cash and cash equivalents on its books and $12.4 billion in long-term borrowings. So this incoming debt load will have a huge effect on the balance sheet – it’s no wonder investors are cooling off on the stock.

Still, the company appears to be able to find relatively cheap debt financing. Its quarterly interest expense is a little north of $100 million these days.

Even if that level more or less doubles, Intercontinental Exchange’s free cash flow is robust – over the past four quarters it has averaged nearly $728 million. The company should therefore continue to have enough cash for interest payments, debt repayment and dividend payments.

Meanwhile, he’s acquiring an asset that, as it says, “complements and enhances ICE’s rapidly growing mortgage technology business.”

In other words, an already powerful company is growing stronger in an area where it is still a relatively new player. Given the quality of management of its core business by Intercontinental Exchange, I have every confidence in its ability to quickly and successfully develop its real estate finance operations. It is likely that Black Knight’s high price will continue to push the stock price higher, but to me this presents a tempting buying opportunity for investors.

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Eric Volkman has no position in the stocks mentioned. The Motley Fool recommends Intercontinental Exchange. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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