Sandra Ward of Barron’s recommended shares of Nasdaq OMX today:

a. The best evidence of the current malaise is in the share performances of the companies that make the markets: NYSE-Euronext, CME Group and Nasdaq OMX have each seen their share prices plummet from their 52-week highs set late last year — by almost half if not more — on concerns about pricing, transaction volumes and the dearth of IPOs.

b. No exchange appears so glaringly mispriced as the Nasdaq OMX Group (ticker: NDAQ). In February, the Nasdaq acquired Norway’s OMX Group. At $23.70, the stock has lost more than 50% of its value and trade at less than 10 times estimated 2009 earnings of $2.41 a share, even though earnings growth is estimated at close to 35% this year and 27% next year. On top of the misery felt by the entire industry, Nasdaq’s shares have been hit by concerns that it overpaid when it agreed to shell out $4.2 billion for OMX.

c. Truth is, financial markets are booming worldwide on the back of the tremendous wealth created by the rise of China and India, the global demand for commodities and the emergence of capitalism as the dominant economic system.

d. Exchanges have become enormously attractive businesses — think of them as tollbooths — often operating as monopolies and doubling revenues every few years. Unless you think the expansion in global stock markets is destined to be short-lived, Nasdaq OMX shares represent an extraordinary opportunity to buy a leader in a rapidly consolidating industry with huge global growth potential, as traders and investors clamor for faster and faster trades on a wide range of products at the best possible prices anywhere in the world.

e. “The revenue-growth prospects dwarf any other time in my history at the Nasdaq,” says Chief Executive Robert Greifeld. “Our master plan is to develop massive scale against an efficient low-cost platform.” that will lead to increased competition. Nasdaq’s goal is to capture 20% of the trading volume in the 300 most active shares in Europe. To achieve its goal, Nasdaq plans to discount transaction costs by 70% to 90%, a move that its low-cost trading platform makes possible.

f. Nasdaq’s powerful franchise, relative pricing power in a quasi-monopolistic business, recurring revenue stream and big exposure to the high-margin and fast-growing derivatives and options business.

g.  OMX can now boast connections to more than 70 exchanges around the world and trading in an increasing number of asset classes, including derivatives, options, bonds and structured products.  On the domestic front, Nasdaq is expected to soon complete acquisitions of the Boston Stock Exchange and the Philadelphia Stock Exchange, pending regulatory approval. Cost savings from the Philadelphia deal are expected to total $50 million within two years of closing. Nasdaq should realize $14 million in synergies from the BSE’s clearing business.

CONCLUSION:

The stock, down sharply since last November, could climb by 50% over the next two or three years as the world’s securities exchanges continue to consolidate.

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