Where Will TMX Group Stock Be in 5 Years?

TMX Group (TSX:X) has an extremely good competitive position.

| More on:
Person holding a smartphone with a stock chart on screen

Source: Getty Images

TMX Group (TSX:X) is a Canadian financial services company that operates stock exchanges and derivatives markets. If you’ve ever purchased a Canadian stock or derivative, you’ve used TMX’s services, whether you knew it at the time or not. Operating the Toronto Stock Exchange (TSX), the TSX Venture Exchange, and the Montreal derivatives exchange, TMX is the giant of Canadian stock exchanges.

The question investors will want to ask themselves here is, “Where will TMX Group stock be in five years?” It’s one thing to observe that a company is dominant in its industry, but quite another to say that it will continue being dominant in the future. It takes a lot of analysis to really determine that an economic moat will last. In this article, I will explore several factors that lead me to believe that TMX Group will be in a better place in five years than it is in today.

Recent earnings

An obvious place to start with TMX Group is the company’s recent earnings performance. The company’s most recent earnings release beat expectations, with EPS $0.02 ahead of expectations and revenue $3.5 million ahead of expectations. The specific figures were:

  • $358 million in revenue, up 23%.
  • $0.30 in diluted earnings per share (EPS), down 3%.
  • Adjusted EPS of $0.41, up 17%.
  • $170 million in cash from operations, up 46%.

All in all, it was a solid showing, corroborating the theory that TMX Group has a strong competitive position.

Outrageous profitability

One sign of a company with a good competitive position is being very profitable. If a company has few competitors, then it has significant pricing power, which usually translates to high profit as a percentage of revenue (“profit margin“). In the trailing 12-month period, TMX Group was indeed quite profitable, boasting metrics like:

  • A 92.4% gross profit margin.
  • A 44% operating profit margin.
  • A 30% net income margin.
  • A 34% free cash flow margin.
  • A 9.6% return on equity.

All-in-all, these metrics suggest that TMX Group is quite profitable. The gross profit margin in particular is stellar.

High growth

Another sign of a company with a strong competitive position is high growth. When a company is strong, it tends to take market share away from competitors. That results in high growth. Here are some of TMX Group’s growth metrics for the last 10 years (on a compounded annual basis):

  • Revenue: 6.7%.
  • Operating income: 7.8%.
  • EPS: 14.7%.
  • Assets: 12.6%.
  • Free cash flow: 12.4%.

These strong growth metrics suggest that TMX Group is doing well and corroborate my claim that the company has a strong competitive position.

Verdict: TMX Group will be doing better in five years’ time

Taking everything into account, I think that TMX Group will be doing better in five years’ time, compared to today. It has few competitors, it’s profitable, it’s growing, and it doesn’t look like it has any future competitors appearing on the horizon. One strike it has against it is valuation: the price tag is superficially steep at 28.5 times earnings. You pay for quality, however, and TMX’s many advantages justify a steep-looking price tag.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends TMX Group. The Motley Fool has a disclosure policy.

More on Tech Stocks

A child pretends to blast off into space.
Tech Stocks

2 Compelling Reasons to Snap Up Constellation Software Stock Now

Here's why I think Constellation Software (TSX:CSU) is a top-tier growth stock to own for the long-term right now.

Read more »

hot air balloon in a blue sky
Tech Stocks

3 TSX Stocks Still Soaring Higher With Zero Signs of Slowing

These three stocks may be soaring higher and higher, but don't let that keep you from investing – especially with…

Read more »

crypto blockchain
Tech Stocks

Best Stock to Buy Right Now: Galaxy Digital or Hut 8 Stock?

Cryptocurrency stocks are roaring, but these two could be your best bets right now.

Read more »

dividends can compound over time
Tech Stocks

Billionaires Are Selling Apple Stock and Picking up This TSX Stock Instead

Billionaires tend to know a bit about making money, so if they're selling Apple stock and picking up this other…

Read more »

An investor uses a tablet
Tech Stocks

3 Reasons to Buy Open Text Stock Like There’s No Tomorrow

Here are the top three reasons why you may want to consider OpenText stock right now and hold it for…

Read more »

Shopify's third-quarter results
Tech Stocks

There’s No Stopping Shopify

Shopify stock exploded this week after the company announced Q3 earnings.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Tech Stocks

High-Growth Canadian Stocks to Buy Now

Are you looking to add some growth potential to your portfolio? Here are three stocks to add to your watch…

Read more »

space ship model takes off
Dividend Stocks

2 Stocks I’d Avoid in 2025 (and 1 I’d Buy)

Two low-priced stocks are best avoided for now but a surging oil bellwether is a must-buy.

Read more »