Deutsche Börse Stock – more profitable than Nasdaq and LSE

The Deutsche Börse stock is one of the few German stocks that did not disappoint its shareholders. Within the last 20 years, the stock price has increased by respectable 700 %.

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Deutsche Börse stock
Logo
Country	Germany
Industry	Exchange
Isin	DE0005810055
Market cap.	34,1 billion $
Dividend yield	1.9%
Dividend stability	0.75 of max. 1.0
Earnings stability	0.75 of max. 1.0

The business model: How Deutsche Börse makes money

Deutsche Börse is primarily known as an operator of important stock exchanges such as the Frankfurt Stock Exchange, Xetra or Tradegate. Furthermore, it now covers the entire value chain in trading. In addition to the classic transactions business, the pre-trading business provides customers with all the necessary information in the run-up to a trade, such as analysis tools or indices. The post-trading business, in turn, ensures the settlement and custody of securities. Deutsche Börse has expanded its business model to include new segments, but without changing the core business model. Deutsche Börse is one of the biggest corona winners in Germany because it has, like the major investment banks in the USA, benefited from heavy trading in recent months. In addition, Deutsche Börse took advanatge from the shift of trading from OTC to regulated markets in recent years. OTC means “over the counter” and refers to the trading of securities outside of regulated exchanges.

Segment: Pre-trading business

The “Qontigo” segment includes the analysis and index business. The index business mainly comprises the index provider Stoxx Ltd, which was founded in 1998 together with the Swiss Stock Exchange and fully acquired in 2015. The best-known index is the “Euro Stoxx 50” and is perceived as the Dow Jones of the Euro zone. With over 10,000 indices, Qontigo is one of the largest index providers worldwide. Axioma, an American provider of risk and portfolio solutions – aquired in 2019 – also belongs to Qontigo.

With a 6.5 percent share of group revenues, Qontigo is still rather small. However, this segment in particular has high growth potential because the need to analyze large volumes of data using algorithms and technologies such as Artificial Intelligence, Machine Learning and Natural Language Processing is growing rapidly.

Segment: Trading & Clearing

These segments are the main contributors to overall-sales

Eurex
Eurex is one of the world’s largest derivatives exchanges (such as options and futures) with approximately 2 billion contracts (equity and interest rate derivatives) traded in 2019 (Source: Deutsche Börse Annual Report).

EEX
The EEX is one of the world’s largest commodity/energy exchanges, which was acquired in 2011. Its strong growth, which was positively influenced by deregulation and the growing renewable energy sector, has made EEX a strong part of the group behind Eurex and Clearstream.

Xetra
Xetra is a well-known electronic trading platform with a market share of over 90% of the german stock trading market.

360T
360T is an ex-Fintech foreign exchange trading company that was acquired in 2015 and is growing rapidly. The daily volume processed rose from EUR 55.3 billion in 2015 to EUR 82.5 billion in 2019 (Source: Deutsche Börse Annual Report).

Tradegate
Tradegate is a small but fast growing electronic trading platform from Berlin, which is very popular among German private clients/users. The fact that Tradegate is also a great success story is clearly shown by the development of transactions from 3.2 million in 2010 to 18.1 million in 2019 (Source: Wikipedia).

Segment:  Post-Trading

Clearstream is responsible for the settlement and custody of securities and is one of the largest players worldwide with an average of €11.5 trillion in securities under management in 2019 (Source: Deutsche Börse Annual Report). Among other things, Clearstream ensures that dividend payments are paid out to the respective stock owners on the pay-date.

The following chart shows the breakdown of net sales of the individual divisions and segments of Deutsche Börse.

Net Sales of Deutsche Börse by segments (Source:
Investor presentation Deutsche Börse
)

How Deutsche Börse is growing profitably

Revenue and Margins Deutsche Börse (Source: Dividendstocks.Cash)

The turnover has more than tripled within the last 20 years. Thanks to simultaneous increases in operating margins and share buybacks, earnings per share have even more than quintupled in the same period.

Profit and Cashflow of Deutsche Börse (Source: Dividendstocks.Cash)

In contrast to many U.S.-managed companies, the increase in earnings per share over the last 10 years is not mainly due to share buybacks. At the end of fiscal 2010, the number of shares outstanding was 186.2 million, compared to 183.4 million at the end of fiscal 2019, just 1.5% less than 9 years before.
To ensure future growth, Deutsche Börse has been making targeted small and medium-sized acquisitions for many years to expand its individual business areas. In addition to the economically very successful takeovers such as Stoxx (2015), 360T (2015), EXX (2011) or Tradegate (2009), Deutsche Börse has made numerous takeovers abroad, especially in the last two years, to further strengthen the presence of the various business areas:

• Axioma from the USA to strengthen the Analytics business (Pre-Trading, 2019)
• Grexel Systems from Finland, a platform for registration of energy certificates (Trading, 2018)
• Joint-Venture Spark Commodities from Singapore as solution provider for liquid gas trading (Trading, 2019)
• Nasdaq Futures from the USA, the Futures Market Business of Nasdaq (Trading, 2019)
• GTX from the USA, a currency trading platform (Trading, 2018)
• UBS Fondcenter AG from Switzerland, a B2B fund platform (Post-Trading, 2020)
• Swisscanto Funds Centre from Switzerland, also a B2B fund platform (Post-Trading, 2018)
• Ausmaq Ltd. from Australia, a fund service provider (Post-Trading, 2019)

Deutsche Börse in international competition

Let’s take a look at the current competitive landscape. If you look at the figures for fiscal year 2019, Deutsche Börse is doing better on the global stock exchange trading market than you might expect:

If you compare net profits of the major exchanges from 2019, Deutsche Börse is on a par with the HongKong Exchange in third place, albeit at a clear distance from the two top performers, ICE and CME from the USA. With a net return on sales of 32%, Deutsche Börse is also in a top position, leaving well-known companies such as Euronext, Nasdaq or LSE far behind. At the same time, Deutsche Börse is probably one of the most profitable companies in Germany.

A look at the market capitalization shows a similar picture. However, the LSE is even slightly more expensive than Deutsche Börse due to a higher valuation. In general, it can be said that the exchange and trading business is very profitable, so that the entire sector has been a very good investment in recent years.

Is the Deutsche Börse stock a bargain?

The Deutsche Börse stock is rather unknown among dividend fans. However, dividends are rising continuously and the current payout of EUR 2.90(approx. $3,45) represents a yield of around 2 percent. However, according to the dividend turbo, the dividend yield has been significantly higher in the past. Until 2014, a 4 percent and more dividend was not uncommon. Including special dividends, the dividend yield was even in double figures for some periods.

Dividends of Deutsche Börse (Source: Dividendstocks.Cash)

The lower dividend yield in recent years is primarily due to the sharp rise of the stock price. In addition, the annual average dividend growth of 3.5 percent over the last 10 years has been rather modest. Besides the increased stock price, it can be argued that Deutsche Börse prefers to keep the money in the company in order to finance further growth, for example through acquisitions.

The current P/E ratio (price-earnings ratio) of around 22 based on expected profits in fiscal year 2022 year does not indicate a bargain, but given the current interest rate situation and the profit dynamics of recent years, this P/E ratio seems to be absolutely justified in my opinion. Compared to other, higher valued German stocks (e.g. Infineon) and the profit strength in times of Corona, the Deutsche Börse stock is relatively cheap. If you look at the profits and market capitalization of the other stock exchange operators above, you will see that no company has a P/E of less than 20. Instead, P/E ratios beyond 30 or even 40 are sometimes paid.

Assuming that we take the higher valuation of the stock over the last few years as a benchmark, the Dynamic Fair-Value calculation shows that the current stock price development is in line with the projected profit development. With a fair value of EUR 180.28 (as of December 31, 2022) this results in a return of 14.5% in relation to the stock price of August 19, 2020 (EUR 157.40).

Fair Value of Deutsche Börse (Source: Dividendstocks.Cash)

The big weakness

I see Deutsche Börse’s greatest weakness in its lack of presence in America and Asia. Despite the numerous acquisitions mentioned above, only 12% of sales are generated in these two regions. This is a major drawback, since Asia is a market of the future and the USA remains the number one financial hot-spot. The weak position in these markets is the result of the lack of mergers with other stock exchanges. In recent years, Deutsche Börse has not been able to successfully complete any major mergers or acquisitions and planned mergers with Euronext, LSE or NYSE have failed last-minute. The takeover of the warrant exchange ISE in the USA was reversed. For the Frankfurt labor market, however, the failure of the major mergers was a blessing, because mergers often lead to job cuts and relocations.

However, achieving economies of scale and expanding the international presence on a large scale can only be achieved in this way. These are some of the major transactions of recent years:

Conclusion: The Deutsche Börse stock is a buy in my view

Despite its weak positioning outside Europe, I believe that Deutsche Börse stocks are attractive in the long term. The business model is highly profitable with low risks and, moreover, is even largely crisis-resistant, which is good news for the stock in times of economic uncertainty. Furthermore, Deutsche Börse enjoys a strong market position in many business areas within Europe. In the USA and Asia, Deutsche Börse is still weakly positioned, but conversely this still holds a lot of potential. If you are looking for a bargain, it is not the ideal stock. On the other hand, the high P/E ratio reflects the high confidence of the capital markets in the stock. In addition, the P/E ratio of quality stocks is currently being driven up by the low interest rate environment.