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.
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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.
