Intercontinental Exchange (ICE, Financial) (6.2% of Sequoia’s capital at year-end, -24% total stock return in 2022)
Though Intercontinental Exchange’s shares were down significantly this year, the business itself did fine on the whole. We added modestly to our position during the year. For the full-year 2022, the company’s revenues and EPS are expected to be up approximately 2% and 4%, respectively. Versus 2019, the company’s revenues and EPS are expected to have compounded at annual rates of approximately 12% and 11% respectively.
Focusing specifically on full-year 2022, business performance was strong across most of Intercontinental Exchange’s portfolio. Taking together the two largest segments – Exchange, in which the company operates a variety of derivative and equity exchanges that enjoy extremely strong, and in some cases monopoly-like, competitive positions, and Fixed Income & Data Services, in which the company offers a variety of data, analytics and related services that are often unique and in any case very sticky – revenues are expected to be up approximately 8%, with operating income likely up more. These two segments drive over 80% of total company revenue and operating income.
In contrast, revenues within Intercontinental Exchange’s Mortgage Technology segment are expected to be down approximately 19% in full-year 2022, with operating income likely down more. Mortgage Technology is sensitive to volumes, and the fact is industry-wide mortgage origination activity fell sharply this past year.
Current weakness aside, we are quite pleased with what Intercontinental Exchange has done, and quite intrigued by what it plans to do, in Mortgage Technology. From a standing start a handful of years ago, the company has assembled a collection of unique and high-quality mortgage- related assets: Mortgage Electronic Registrations Systems (a national electronic registry that tracks servicing rights and beneficial ownership interests in US-based mortgage loans), Simplifile (a network that serves as an electronic liaison between lenders, settlement agents and county recording offices), Ellie Mae (the largest loan origination system software provider in the US) and, if regulators approve the pending deal, Black Knight (the largest mortgage servicing software provider in the US). The company believes this collection of assets will allow it to facilitate a more digitized workflow across the notoriously paper-based and cumbersome mortgage lifecycle.
At the current share price, Intercontinental Exchange trades for approximately 19x expected EPS for 2023. We consider this an attractive price for a set of businesses that possess obviously appealing financial characteristics, enjoy very strong competitive positions, are capable of driving double-digit EPS growth for years to come, and are overseen by CEO Jeff Sprecher, who built the company out of whole cloth and whose track record speaks for itself.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
