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Stockwatch: ASX Limited (ASX)

August 2nd, 2009 · Greg Atkinson · 2 Comments

Now that the worst of the stock market rout appears behind us perhaps it is a good time to think about investing in a stock that should rise along with any bull market rally. ASX Limited is one stock that may allow investors to do just that, while at the same time providing income via franked dividends.

A few years ago I looked at ASX Limited but decided not to buy into the stock because it was trading around $50 and it’s Price to Earnings Ratio (PER) was getting up near 40.  I was a little annoyed then to watch the stock soar up to $60s soon after and thought I had made another one of my great stock picking blunders.

However by early 2008 it had come crashing down to around $35 a share and now that is is trading just above that price (after hitting a 52 week low of $23.52) it would seem like a good time to have a look at this stock again.

ASX Limited (ASX) 3 year price chart – August 2009

asx-3-years-chart-aug-09

ASX Limited operates Australia’s primary exchanges and at present has little competition. The company also provides market data and other associated services and therefore it has a somewhat diversified income base.  Even if you sell stocks at a loss during a rout, the ASX will make money from that transaction and so in many ways the company is in a win-win situation.

Revenue may drop from a decline in new listings or an overall drop in transactions, but generally speaking even during a bear market money will still be coming through the door. The stock therefore is cyclical in nature but probably less so than many investors would appreciate.

According to the ASX Group Monthly Activity Report (June 2009) the average value per trade was $11,303, down 20% on the pcp of $14,098, and the average value per trade for FY09 was $10,587, down 40% on pcp ($17,692). This is not surprising since the value of stocks have fallen, but the average value per trade should rise if the current rally in shares prices continues.

The rest of the June Report reflects a downturn in some of the ASX’s core business areas though it appears that things are picking up again and that earning may be on the rise. Any future rise in earnings will be pretty much linked to the fortunes of the Australian stock market and the new launch of new products.

What I like about this stock is that it has outperformed the S&P/ASX 200 (see chart below) over the last few years and so possibly it will do the same during any future rally. It also pays a fully franked dividend of 4.8%, the ROE (Return on Equity) looks good at around 13 and the operating margin looks very healthy. (over 70% as of 2008/06)

ASX Limited (ASX) versus S&P ASX 200 Index (XJO) Chart (Aug 09)

asx-vs-sp-asx-200-3-years-chart-aug-09

But the PER is now close to 20, so on that measure the stock is not what I would call cheap. Also some competition is on the horizon and although over the short term the company will remain in a strong position the fact is the playing field will change.

In addition I am a little uncomfortable with the ASX being in the position where it essentially regulates itself and is also responsible for supervising the market. There have been some concerns raised about these issues by market commentators and politicians so regulatory changes cannot be ruled out. Personally I would prefer ASIC to be more involved although having said, that the performance of ASIC would need to be improved.

ASX Limited is a quality company, operates a good business and has fairly secure income streams.  If investors continue to move back into stocks and the other financial products offered by the ASX then earning should rise and the stock price move upwards.  However my feeling is that there are better stocks to buy at the moment and it is also unclear how competition will affect the company’s future earnings.

Remember as always to do your own research and that I am not suggesting anyone buy/hold or sell this or any other share or stock. My intention is to simply throw up some listed companies or investments I believe are worth having a look at.


2 responses so far ↓

  • 1 Senator13 // Aug 30, 2009 at 9:28 am

    What do you make of the recent announcements that ASIC will take over the role of playing regulator from the ASX. Would this undermine some of the monopoly control that the ASX has enjoyed over the last few years?

  • 2 Greg Atkinson // Aug 30, 2009 at 11:02 am

    Senator13 I think the more worrying development for the ASX will be the entrance of new competitors and this seems to be case now of when, rather than if. The stripping of some of it’s regulatory powers I believe shows the government is keen to loosen the ASX’s monopoly like grip.

    The move to hand over some market regulation to ASIC is a step in the right direction. I also have no problems with new players creating some competition for the ASX, although I would probably think differently if I held ASX shares 😉

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