We hosted a BlackBook call on recent IPO Bats Global Markets (BATS) last week. We have added shares to our Long bench this morning with a $34 fair value and think a tactical entry point will come about after 2Q16 earnings which will make the stock a Best Ideas Long. Enclosed is the replay to our call and associated materials.
CLICK HERE TO WATCH THe VIDEO REPLAY:
BlackBook Presentation HERE
Audo replay HERE
Perversely, Recessions Are Best: While investors are in love with growth, counterintuitively recessions or phase transitions from growth to economic decline are a boon for the exchange sector. Volatility rises substantially late in the cycle and the onset of recession is a very profitable time for the sector. While a violent rise in volatility is not good for the broader trading community, a run-of-the-mill recession and volatility above current, historically low levels is a solid catalyst for the group.
Mind Your Exposures: Another hallmark of economic declines is the consistent rise of corporate credit spreads over Treasuries, however we are confident that the agency-only operations of the exchanges is an all-weather business. With the highest ROIC and lowest cost of capital in Financials, the sector can outperform partly because it's a self-funding sector.
Not Bullish Enough: We see substantial opportunity in U.S. options and U.S. ETFs, as the recent merger of Nasdaq and ISE puts market share up for grabs. Furthermore, we don't think BlackRock is simply "spreading the chips around" with its recent BATS ETF listing. Rather, we think that once it gets through this trial period, BATS' lower-cost listing venue should gain more share. We are +10% above consensus for next year and think that, relative to a Financial sector with negative top line and earnings growth, investors will pay more for whatever growth is available.
Please let us know of any questions.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA