Some lucrative investment opportunities remain hidden in plain sight. Many Canadian traders and stock investors traverse the Toronto Stock Exchange (TSX) and its siblings daily, searching for sizeable returns on thousands of tickers. Rarely do they stop to seriously consider the exchange itself as an investable wealth-creating business. The TSX’s owner is one of Canada’s top stocks to check out today.
Perhaps it’s time to consider owning a piece of the machinery behind Canada’s investment industry.
Check out the TMX Group’s stock
TMX Group’s (TSX:X) stock ticker should arguably be the most popular among Canadian top stocks for a simple reason. The company owns and operates the country’s larges, essential capital and investment market exchanges. These include the TSX, the TSX Venture Exchange (TSXV), the Alpha, and the Montreal Exchange for Canadian derivatives contracts and Shorcan brokerage.
The company’s business is designed to offer a full-service menu to the local capital markets. Its business segments include capital formation services for equity or debt issuances, equities and bonds trading and clearing services, and derivatives trading and clearing. Most noteworthy, the company’s fast-growing global solutions, insights, and analytics segment is powering margin expansions.
Consistent organic growth
TMX Group has been consistently growing its revenue, operating profit margins, and free cash flow over the past three years.
The group welcomed the second-highest number of new listings among the world’s top exchanges with 146 in 2018 and 250 listings in 2019. There were 68 new listings during the first quarter of 2020, the majority of which are in the innovative sector of the economy — a fast-growing vertical.
New listings should provide new sources of annual recurring revenue, as listed firms pay fees to the exchange every year. Although the COVID-19 pandemic and its associated volatility and uncertainty could dampen growth in new issuances, companies will need to repair their balance sheets, as the economy rebounds post the crisis, and new debt and equity offerings could flood the exchanges in the near future.
Derivatives trading is gaining momentum in Canada and across the world. The company is cashing in on this trend through growing business volumes. Derivative contracts traded increased from 112.2 million in 2018 to 116 million last year. A further 27% year-over-year surge in derivatives trading volumes was reported for first-quarter 2020.
More recurring business came in June this year. The Montreal Exchange launched the three-month Canadian Overnight Repo Rate Average (CORRA) futures contract last month. This is an essential local interest rate benchmark that replaces the use of the old IBOR benchmark.
Growth through strategic acquisitions
Most noteworthy, the 2017 acquisition of Trayport has done wonders for the business. Trayport is Europe’s primary connectivity network and data analytics platform for the wholesale energy market. The platform powers 80% of all power, gas, coal, emissions, and freight energy trading in Europe. Business volumes have been increasing by high double digits year over year recently.
Further, the company should enjoy higher business volumes and expanding profit margins, as the world’s energy markets increasingly embrace derivatives and algorithmic trading.
To add more, the U.S. energy market will welcome Trayport’s Joule platform soon. A recent deal was entered with the Nodal Exchange, a Washington D.C.-based derivatives exchange that serves commodities markets.
Basically, the company is growing into an international player in the data services, analytics, and derivative contracts trading verticals. Ex-Canada revenue has grown to 33% of total sales. Annual recurring revenue increased from 40% in 2016 to 52% by the end of the first quarter of 2020. This should mean improved revenue and cash flow visibility going forward.
Strong economic moats
The TMX Group faces no significant competition in Canada. Its ability to nurture early-stage issuers on the TSXV until they graduate to the senior TSX is an unparalleled moat no competitor can easily replicate globally.
The TSX remains an exchange of choice for both local and internal firms. Companies value prestige, deep liquidity, and wider access to international growth capital. Any company that hopes to be included in the prestigious and valuation boosting S&P/TSX Composite Index, the country’s benchmark stock index, will target listing on the TSX.
The situation could remain so for some decades to come. Perhaps it’s time to take a closer look at this essential services provider for its strong wealth creation potential.