NDAQ Makes Some Noise

In what seems to be a prevalent trend after examining the earnings of the exchanges this quarter, Nasdaq OMX (NDAQ - commentary - Cramer's Take), in what was a noisy quarter given the integration of OMX, reported operating earnings of 48 cents per share, thanks primarily to better-than-expected expense savings by the over-the-counter exchange.

The reported operating EPS was a penny below consensus, while net revenue of $278 million missed the consensus estimate by $20 million. I wouldn't put too much emphasis on results relative to expectations, however, since it is difficult to know what analysts had built into their models (pro forma, vs. when OMX was included, etc.).

Nasdaq OMX continues to be the beneficiary of the heavy volume being traded. As one bullet point in the press release noted,

"Expanded our leadership position as the largest single pool of liquidity in which to trade U.S.-listed equities, matching a record high 31% of all volume for the first quarter 2008."

One of the reasons we owned the shares previously was that Nasdaq had no open-outcry system to move away from; it has been all-electronic from day one of its inception.

Like the other exchanges, Nasdaq OMX is going global, as it announced that it had signed an agreement with the Bombay Stock Exchange to serve as the Indian exchange's new trading and clearing platform for derivatives and cash securities. (We apologize since in our preview we had categorized the BSE as the Boston Stock Exchange.)

Finally, Nasdaq OMX announced that, based on the good start to the year and the better-than-expected results from the new technology road map, expense savings (or what is being termed "synergy achievement" by the CEO) will now be $30 million for full year 2008 vs. the previous $25 million. Given the current share count, this additional $5 million in savings amounts to about 12 cents per share, using the 214 million share count provided in the press release.

To conclude, it may take some time for sell-side analysts to work through all the numbers, but as long as Nasdaq OMX can continue to grow volume -- and not an insignificant portion of market share gains are coming at NYSE Euronext's (NYX - commentary - Cramer's Take)expense -- and control expenses, the business has a winning formula. Having said that, it seems to me as though valuations continue to be depressed as the merger activity goes on unabated and stock is being used as currency.

Although we don't currently own the exchange, after the revision of estimates, the stock should work higher given the valuation relative to its growth rate. Nasdaq OMX is well-positioned, but the exchanges will continue to have a food fight as they all battle for volume, international exchanges and product differentiation.

For Gilmartin's preview heading into the Nasdaq OMX conference call, please click here.

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At the time of publication, Gilmartin had no positions in the stocks mentioned, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.