As I've covered in my past few e-mails, my college buddy Bill Ackman initiated six new stock positions for his firm, Pershing Square (PS), during the second quarter.
On Friday and Monday, I took a "first glance" at each of them and shared excerpts from Bill's latest shareholder letter.
Yesterday, I took a closer look at one of the stocks – S&P Global (SPGI). I concluded that it's a "far-above-average business trading at a market multiple."
Today, let's look at another of Bill's new positions – Intercontinental Exchange (ICE). As he concluded in his letter:
We believe that a favorable macro backdrop and powerful secular tailwinds should enable ICE to achieve low-to-mid-teens earnings growth, which combined with a multiple re-rating toward year-ago levels as our thesis on the secular concerns is borne out, creates the potential for an annualized stock return in the mid-20s%...
In summary, in ICE we see a classic, simple, predictable, free-cash-flow-generative business that has sold off on concerns we view as unwarranted, a setup that has proven highly profitable for prior Pershing Square investments.
As always, whenever I review a company's historical financials and valuation, I like to start with revenue and operating income...
Both metrics have had spectacular growth over the past two decades, without any hiccups whatsoever, as you can see in this chart:
It's a fantastic business with sky-high profit margins. I don't recall the last time I saw a company with a 100% gross margin (meaning it has no cost of goods sold):
The business has minimal capital expenditures ("capex"), as well as high and steadily rising free cash flow ("FCF"):
It has primarily used its prodigious cash flows on acquisitions, plus a modest dividend (currently 1.3%) and share repurchases:
Intercontinental's major acquisitions have been:
- Exchange operator NYSE Euronext in 2013, for $11 billion in mostly stock
- Financial analytics company Interactive Data Corporation in 2015, for $5.2 billion in mostly cash
- Mortgage and loan origination platform Ellie Mae in 2020, for $11 billion in cash
- Housing software firm Black Knight in 2023, for $13.1 billion in cash ($11.9 billion adjusted for divestitures)
These acquisitions far exceeded FCF, so Intercontinental's debt rose to a peak of $22.1 billion in 2023 as a result.
It has paid down this debt to $19.5 billion today – a modest level for a company that generated $5.1 billion of FCF in the past 12 months:
Its share count rose substantially to pay for NYSE Euronext in 2013 and has remained steady since then:
Overall, this is a wonderful financial picture – though I'd give it an A- rather than an A+ due to so many big acquisitions.
As for valuation, the stock has consistently traded around 20 times forward earnings since the global financial crisis, then dipped to 15.4 times earlier this year. It now trades at 19.2 times this year's consensus analysts' estimates and 17.7 times next year's:
These are modest, below-market multiples for a far-above-average business. So I think Bill is likely right that Intercontinental's stock will outperform in the coming years.
My team and I at Stansberry's Investment Advisory will take a deeper dive. If we decide to recommend it as our best stock idea in an upcoming monthly issue, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.