TMX Group (TSX: X) is Canada’s biggest operator of stock exchanges and derivatives clearing houses. Operating the Toronto Stock Exchange (TSX), the venture exchange and the Montréal Exchange, it really dominates the platforms that Canadians buy and sell securities on. Truthfully, the only well-known Canadian exchange/clearinghouse that it doesn’t own is the small-cap growth exchange Canadian Securities Exchange.
So, TMX Group operates services that are critical to the functioning of Canada’s economy, with nearly no competition. As you might imagine, this quality gives TMX Group ample amounts of profitability, growth, and optionality. In this article, I will explore three key reasons why X stock may be worth buying like there’s no tomorrow.
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#1: Little competition
The biggest advantage that TMX Group has by far is its competitive position. Put simply, the company has almost no competitors, and it literally has no competitors comparable to it in size.
The Canadian stock exchange business is not exactly bursting at the seams with competitors, to put it mildly. TMX Group operates the two main ones: the Toronto Stock Exchange (TSX) and the TSX Venture Exchange. Additionally, it operates the main derivatives exchange (Montréal Exchange) and the main clearing house (Canadian Derivatives Clearing Corporation (CDCC)).
Here’s a quick test:
Look at the list of exchanges and clearinghouses above and ask, “Apart from over-the-counter (OTC) issues, have you ever traded Canadian securities not listed on at least one of them?” If you’re like me, your answer to that question is a firm “no.”
So TMX Group has an overwhelmingly dominant position in Canadian stock exchanges, and with that you’d expect to see the company producing excellent growth and profit numbers.
#2: Very strong growth
On the growth front, TMX Group is solid. It grew its revenue 17%, its earnings 9%, and its free cash flow (FCF) 32% in the last 12 months. Over the last five years, it compounded those same three metrics at 10.9%, 8.8%, and 16.9%, respectively.
#3: Off-the-charts profitability
As if the growth wasn’t enough, TMX Group is ultra-profitable. In the trailing 12-month period, it had a 92% gross profit margin, a 29% net income margin, a 34% free cash flow margin, and a 9.5% return on equity. These metrics are incredibly solid, but you wouldn’t expect any less for a company with as strong a competitive position as TMX Group.
Valuation
The one potentially sour point for TMX Group is the stock’s valuation multiples. Going purely by the numbers, you might be inclined to think the stock pricey. At today’s prices, X stock trades at:
- 28 times adjusted earnings.
- 30 times reported earnings.
- 9 times sales.
- 2.8 times book value.
- 21 times operating cash flow.
These multiples are certainly not dirt cheap. But then again, they are no higher than those of the S&P 500, and TMX Group faces far less competition than the big S&P 500 companies do. There are many good reasons to expect TMX Group’s growth, profitability, and other positive characteristics to persist into the future. So, potentially, X stock is worth the investment.
