New US Equity Trading Initiative And CDS Clearing Platform Modernization Will Improve Competitiveness

Key Takeaways

• TMX Group's strategic acquisitions and partnerships are set to enhance capabilities and product offerings, driving future revenue growth in various markets.
  
• Global expansion initiatives and increasing demand for derivatives trading support ongoing revenue and earnings growth, with a focus on innovation and competitiveness.
  
• Regulatory challenges, acquisition integration risks, and macroeconomic factors could hinder TMX's revenue, profit margins, and strategic growth initiatives.

Catalysts

Operates exchanges, markets, and clearinghouses primarily for capital markets in Canada, the United States, the United Kingdom, Germany, and internationally.

• TMX Group's recent acquisitions, including iNDEX Research and Newsfile, are expected to enhance their operational capabilities and expand product offerings, particularly in index management and news dissemination across new geographic and asset classes, which should drive future revenue growth.
  
• The TMX VettaFi partnership shows promise for accelerated growth in Global Solutions, Insights, and Analytics (GSIA), specifically through increased indexing revenue and growing assets under management, which can positively impact long-term revenue trajectory.
  
• TMX Trayport is pursuing global opportunities in new geographies and asset classes, such as climate and power markets, which can drive future revenue growth and enhance earnings by leveraging existing network strengths.
  
• Continued growth in derivatives trading, particularly in interest rate products and the adoption of new trading strategies, supports sustained revenue and earnings growth, driven by rising demand and product innovation.
  
• Upcoming initiatives, such as the launch of a U.S. equity trading initiative and the modernization of the CDS Clearing platform, aim to enhance execution quality and improve competitiveness, potentially boosting revenue and creating efficiencies that enhance net margins.

TMX Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TMX Group's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.7% today to 29.3% in 3 years time.
• Analysts expect earnings to reach CA$516.0 million (and earnings per share of CA$2.05) by about December 2027, up from CA$406.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2027 earnings, down from 29.9x today. This future PE is greater than the current PE for the CA Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 3.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

TMX Group Future Earnings Per Share Growth

Risks

• The complex regulatory landscape and potential changes in access fees in the U.S. market could present challenges for TMX, affecting both competitive positioning and possible revenue from U.S. client transactions.
  
• While TMX is expanding through acquisitions such as VettaFi and Newsfile, the integration of new businesses with different technologies and approaches can pose execution risks that may impact net margins and earnings.
  
• Lower revenue from the Capital Formation segment due to reduced financing activities and challenging market conditions could pressure overall revenue growth and profit margins.
  
• Increased operating expenses related to acquisitions, performance incentives, and expansion initiatives may strain net income, particularly if anticipated synergies and growth do not materialize as expected.
  
• The company's reliance on international market growth and potential macroeconomic challenges (e.g., interest rate fluctuations) could negatively impact listing, trading volumes, and subsequently revenue and earnings.

Valuation

• The analysts have a consensus price target of CA$47.5 for TMX Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$1.8 billion, earnings will come to CA$516.0 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$43.81, the analyst's price target of CA$47.5 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.