One of the benefits of living through a year like 2008, is the potential to capitalize on rebound opportunities in 2009.  To find attractive and safe rebound candidates, it is important to look for a sustainable business model, a financially sound balance sheet, and a multiple that reflects concern rather than optimism.  These factors all apply to NYSE Euronext (NYX) which is setting up to be a strong turnaround stock in 2009.

Over the past year, NYX has had to play defense as changing technology and volatile markets have pressured the company.  The NYSE floor and open outcry system are quickly becoming a thing of the past, and the exchange has had to scramble to keep up with competition.  But hefty investments in new platforms have increased the performance of its systems and it now appears that NYX is winning back business from competing exchanges.

Volatile markets have added to volume in 2008, but the volatility has led to many fewer new listings.  In the past this had been an important source of revenue so the lack of IPO activity has certainly had an effect on profits.  This may not change in 2009, but there is potential for growth as the upcoming launch of CDS contracts may give the exchange a new class of revenue.

Another headwind the company has faced is related to foreign exchange.  With the purchase of Euronext, the company now sees roughly 40% of revenue and 70% of operating profits from operations in Europe.  A strong dollar throughout much of 2008 has depreciated those profits when stated in dollar terms.  However, as US interest rates are cut to near zero, and the Fed is finding new creative ways to pump liquidity into the market, the US dollar is finally beginning to weaken.  If the dollar continues to slide in 2009 (which is very likely) this headwind will quickly subside and could even become a benefit to the company.

As of the end of the third quarter, NYSE was sitting on roughly $1 billion in cash and equivalents.  Most of this will actually be used during the course of the year as a hefty dividend policy, investments in two data centers, and a large payment to LCH Clearnet will likely exceed $900 million.  But during the year the company is expected to generate $1.4 billion in EBITDA leaving it in strong financial shape.  Total debt is $3.2 billion which is no small matter, but considering the cash-flow of this strong company, it is more than manageable.

The stock has dropped more than 80% from its peak and yet the business itself continues to grow.  The published PE is now roughly 8 which is very low compared to the stock’s normal range.  At the current price, the dividend yield is 5% and management appears committed and financially able to maintain the dividend.  In short, this washed out name looks like an excellent opportunity to hold for the majority of 2009.

FD: Author does not have a position in NYX
NYX Notes
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