Cheapest Exchange Stocks Dropping on Profits, Trading Decline

By Nandini Sukumar and Edgar Ortega

Feb. 24 (Bloomberg) -- The world’s biggest stock exchanges are trading at the cheapest levels ever compared with earnings and profits may suffer as trading slumps in the worst start to a year for equities on record.

Deutsche Boerse AG, owner of the Frankfurt exchange, will say today that quarterly profit dropped for the first time since 2004, according to analysts’ estimates compiled by Bloomberg. London Stock Exchange Group Plc’s revenue from trading fell for two quarters, while NYSE Euronext reported this month that fees from its European bourses decreased 4.1 percent.

Trading fees tumbled as much as 13 percent along with stock volume as the MSCI World Index of 23 developed countries dropped 18 percent this year and competition from so-called electronic platforms increased. Investors already devalued the companies, whose shares trade at less than 7 times earnings.

“We live in a new world now,” said Bernard Isagba, head of trading at Redmayne Bentley Stockbrokers in London, which owns LSE stock. “There’s a lot of competition and many of the trading desks and banks that generated the volumes are just gone; 2009 is going to be very difficult for volumes. Exchanges are going to have to struggle to stand still.”

Equity volume is drying up. Trading on the LSE averaged 2.3 billion shares a day over the last year, the lowest since at least 2004. Volume dropped 19 percent from the previous year as more than $1 trillion of bank losses froze credit markets and reduced speculation by hedge funds that rely on borrowed money.

NYSE daily trading averaged 1.45 billion in the last year, down 9.5 percent from a year earlier, according to data compiled by Bloomberg.

Tumbling Values

Revenue from electronic trading may fall by more than 50 percent for the exchanges in 2009, according to Sanford C. Bernstein & Co. analyst Dirk Hoffmann-Becking in London. Earnings per share at Deutsche Boerse and LSE may drop more than 20 percent, he said.

Deutsche Boerse trades at 6.6 times profit, the cheapest on a weekly basis since going public in 2001, after the Frankfurt- based company’s shares slumped 74 percent since the start of last year. Fourth-quarter earnings probably fell after last year’s income was boosted by a gain from a property sale.

Net income may slip 24 percent to 206.6 million euros ($264.6 million) from 270.5 million euros, according to the median forecast of seven analysts.

Nasdaq OMX Group Inc., the electronic exchange that handles the most shares in the U.S., failed to wrest business with its four-month-old pan-European platform, which handled 0.1 percent of the value traded in January. Last year, Chief Executive Officer Robert Greifeld called the system Nasdaq’s single biggest opportunity for growth.

Nasdaq Earnings

The company may report a 36 percent gain in fourth-quarter net income on Feb. 26, according to the average estimate of eight analysts surveyed by Bloomberg.

Analysts expect overall trading on venues owned by Nasdaq to rise in the fourth quarter, helped by the July acquisition of the Philadelphia Stock Exchange, the third-biggest U.S. options market. Matched trading on all Nasdaq platforms increased 11 percent in January from December, the company said Feb. 12, as it gained business in NYSE-listed stock.

New York-based Nasdaq’s shares dropped 60 percent since the start of 2008, leaving them valued at 10.7 times profit.

LSE, Europe’s oldest independent exchange, trades at 6.5 times earnings, compared with 9.7 for the Stoxx 600, weekly data show. New York-based NYSE Euronext, which operates markets in Paris, Amsterdam, Brussels and Lisbon, is valued at 6.2 times profit, about half the 10.5 ratio for the Standard & Poor’s 500 Index.

Trading Sinks

Average daily volume for NYSE’s European cash trading last month dropped 30 percent to 1.3 million transactions, and average daily trading on the LSE fell 30 percent to 881,609 transactions, data compiled by the exchanges and Bloomberg show. German stock- exchange trades slipped 68 percent from a year earlier to 105.5 billion euros in January.

“We believe the uncertainty regarding the volume outlook in 2009 will continue to weigh on Deutsche Boerse and other exchanges,” Nese Guner, an analyst at Nomura International Inc. in London, wrote in a Feb. 18 note.

Guner estimates Deutsche Boerse’s stock trading is falling 25 percent in the first quarter. Trading at the exchange’s Eurex derivatives unit will slip 20 percent instead of gaining 10 percent, the analyst said.

Electronic trading platforms are also eating into the exchanges’ market share. London-based Turquoise and Chi-X Europe Ltd. captured 15 percent of European trades measured by value of shares in January, according to data compiled by Kansas City, Missouri-based Bats Trading Inc.

Deutsche Boerse, LSE and NYSE Euronext, which had a virtual monopoly over trading in their own markets three years ago, handled a total of 65 percent of the value traded.

To contact the reporters on this story: Nandini Sukumar in London at nsukumar@bloomberg.net; Edgar Ortega in New York at ebarrales@bloomberg.net.