NYSE Investors Beware

Before you get caught up in the hype and go out and buy shares in NYSE Group (NYX), I urge you to do some basic valuation work. Shares of NYX, the newly formed public combination of Archipelago and the New York Stock Exchange, opened at $67 per share yesterday and proceeded to close at $80. Today the stock is up another $6 at the open. Current market value at $86 per share: $13.6 billion, based on 158 million shares outstanding.

The reason for the rise has more to do with limited supply than anything else. Retail investor interest has been strong so far, and there simply aren’t many shares available to buy. Much of the stock is being held by NYSE seat owners and member firms, who can’t sell it right now. A supply-demand imbalance is causing a short term spike, but a closer look at the company’s valuation makes it clear that anyone paying $86 is playing with fire.

Keep in mind that Archipelago (AX) stock traded at $17 before the merger with the NYSE was announced last year. The combination has resulted in a 400% increase in the value of that equity (AX shares became NYX shares beginning yesterday). I don’t doubt the deal will be accretive, but isn’t 400% a bit extreme?

AX was expected to earn $1.11 per share in 2006 before the deal closed. Even if that number winds up being $1.50 after the merger (a VERY optimistic projection), the current forward P/E of NYSE Group is 57 times. Buyer beware.

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3 Thoughts on “NYSE Investors Beware

  1. NO DooDahs on March 9, 2006 at 12:07 PM said:

    Gee, small float, big demand, stratospheric PE … remind anyone of GOOG?

    Perhaps buying into the mania and selling at the first sign of topping, then turning around and shorting is a good strategy?

  2. Chad Brand on March 9, 2006 at 12:45 PM said:

    I don’t even think one can come up with logic that justifies this valuation on NYX. I’d be curious to hear a bullish case at these levels, though, if anyone is taking that side of the trade.

    No matter what one’s view on GOOG, GOOG seemingly deserves a higher multiple.

    I agree that a short at some point on this one is warranted, but who knows when shares will be easily available for borrowing.

  3. Positives: NYX must own stock for fund managers. Mr. Thain will make some nice moves. NYSE becomes more electronic. NYSE will extend hours of operation. Lots of saavy investors already made ton of money off of AX understanding crooks on wall st. downgraded ax since 30 and are still talking this NYX down. May come down like you say but if you want to hold NYX long term you should be a-ok.

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