ICE: Cooled Off, Making it Hotter

Companies create wealth over time by growing their assets and earnings. Some of them pay dividends which typically rise along with improving fundamentals. Shares in these growth firms are pretty sure to go up in value over the long term.

Intercontinental Exchange (ICE) came public on November 21, 2005 at a price of $26. Its shares closed on May 9, 2014 at $188.23. That is a gain of 624% plus dividends in the 8.5 years since its IPO.  

ICE’s results from 2006, its first full year as a public company, explain the good price action. The stock, which has more than doubled, has actually gone up a bit less than most other measurable business categories.

The vagaries of the stock market have priced ICE everywhere from cheap to dear throughout its history. Traders who initiated positions in 2007 at an absurdly high P/E ratio (57.5x) are still underwater today, almost 6.5 years later.

ICE posted stellar results since then but P/E compression kept shareholders singing the blues. That was also the case for buyers in mid-2009 at more than 28x earnings. It took over three years for the fundamentals to catch up to the share price.

Conversely, there is nothing sweeter than the wonderful effect of an expanding multiple on rising EPS. Buyers near the low valuation points during the past few years have seen great total returns.

Intercontinental Exchange has always been a good company. It has sometimes been a good stock. Investors don’t get many chance to buy at prices like 2008’s nadir. Throw that sub-12 P/E out as an outlier that is unlikely to present itself again.

ICE’s 2010 and 2011 exact low valuations came at 17.3x and 14.9x the earnings in those years. The current quote of $188.23 represents a similar 17.2x this year’s estimate of $10.94 and 14.0x the consensus view of $13.42 for 2015.

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