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3:44 pm
January 17, 2011
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leongcpa
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From Footnote 2 of Part II, Item 6 (page. 66) of the 2009 Annual Report: "Clearing members of IC Clear Europe, ICE Clear U.S., ICE Clear Canada, ICE Trust, and TCC are required to deposit original margin and variation margin and to make deposits to a guaranty fund. The cash deposits made to these margin accounts and to the guaranty fund are recorded in the consolidated balance sheet as current assets with offsetting current liabilitiies to the clearing members that deposited them. ICE Clear Europe began clearing contracts in November 2008 upon the transition of clearing from LCH.Clearnet Ltd. ICE Trust began to clear credit default swaps contracts in March 2009. See note 12 to our conslidated financial statement and related notes that are included elsewhere in this Annual Report on Form 10-K." Footnote 12 has alot more information about the Guaranty Fund and each individual clearinghouse.
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11:43 am
January 16, 2011
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Jae Jun
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Yes It does seem like the short term investment has to be taken out in this case. I wonder why it is so huge compared to previously?
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1:16 am
January 14, 2011
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leongcpa
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| Member | posts 13 |
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Ok, I think I understand what's going on. The DCF calculation is adding the short term investments and treating it as Cash. I don't think that should be used as they are likely collateral that the exchanges' parties put up for the privilege of trading on ICE's exchange. Hence the large short term liability balance. If I take the short term investments out of the equation and only use the Cash & Cash equivalents balance, I then use a growth rate of 15%, a discount rate of 15%, and FCF of $441MM, I only get an intrinsic value of $93.22. This is much more in line with my expectation, and explains why my iniital intrinsic value did not quite jive with my expectation of where P/FCF should be and withe the sensitivity matrix. So, in other words, the stock is not that cheap.
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1:07 am
January 14, 2011
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leongcpa
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I think there is something odd about how the stock valuation excel spreadsheet is calculating ICE's intrinsic value. When I look at the DCF valuation, I get an intrinsic value of $390.64 using a 10% growth assumption, MOS of 66%, a discount rate of 20% and FCF of $441.9MM as the basis. But when I look at hte Sensitivity Matrix and the Dashboard graph, I get completely different values ($58?). I'm wondering which is right and whether there is something wrong with the spreadsheet?
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11:39 pm
January 13, 2011
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leongcpa
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Not sure what you mean by it doesn't have cash flow statement since it's a financial institution? I can see a statement of cash flows right on their 10-K (p. 101). Hey Jae, I'm wondering why the P/FCF is so high (16). Typically when I see such a large intrinsic value difference, the P/FCF ratio is also extremely low (below 10). I'm wondering if you see anything I'm missing?
The more I read about ICE, the more I like it as an opportunity. Lots of cash flow, a great business model, a wide moat.
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9:36 pm
January 13, 2011
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Discountvalue
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Hi Jae,
Since ICE is a financial institution it doesn't have a cash flow statement. Do you use Net Income to determine the FCF numbers? Also, it seems to me that determining the starting FCF number to use for discounted cash flow analysis is the hardest number to determine. Growth, discount rate and margin of safety seem fairly easy to determine. Would you say using the current TTM FCF or owner earnings is the best or would a median or average of previous years be a better method? Would it depend on the business cycle of the business? You have a great site here by the way!
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2:11 pm
January 13, 2011
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leongcpa
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One thing that concerns me is the insider activity; seems to be more dispositions/sales than purchases. On the other hand, the company did a rather big stock repurchase at the $90's per share range.
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12:16 pm
January 13, 2011
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Jae Jun
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A cash flow analysis and valuation is much more trustworthy than PE.
On a cash flow basis, ICE looks VERY cheap.
Margins are going down, but the business is a great model. Looks like a cash flow machine more than anything.
I'm going to have to look in more detail.
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5:06 pm
January 12, 2011
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leongcpa
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| Member | posts 13 |
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Using $300MM FCF, 0% growth rate assumption, 20% discount, I get an intrinsic value of $360 or so. Price is around $117 per share. Wide moat. Risk comes from having most of revenue derived from only a few customers and potential government regulartion. It looks cheap based on this quick analysis. But when I look at P/FCF (16.2) and P/E (21.9), it doesn't seem so cheap. What am I missing?
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