NASDAQ OMX (Ticker NDAQ) - My next purchase

My accounts are currently in limbo as I move them from my former employer, but I think NASDAQ will be the next stock I buy.

Nutshell Thesis:
I think NASDAQ is the Wal-Mart of the market structure industry. Their mantra is “extreme efficiency against massive scale”. They are trying to leverage their world-class technology for execution and clearing across multiple asset classes and geographies. My investment thesis is that they will be successful in their expansion efforts largely because they have a proven track record in US equities, which I consider one of the most competitive and commoditized markets. The markets they are trying to enter are much less competitive and commoditized. I like the management team, their business model, and the price.

Not the NASDAQ you remember:
Most people think of NASDAQ as the start up US equity exchange from 2000. They are much more diversified now. NASDAQ allows customers to trade stocks listed on NYSE/Archa, AMEX, or NASDAQ. They earn revenue from execution fees as you would expect, but also from listing fees, market data fees, broker access fees, and corporate services to their listed companies. That is just US equities. Through a series of acquisitions, they also offer execution of US options, Nordic equities and derivatives, and carbon and emissions derivatives in Europe. Additionally they are trying to expand into several new areas, often with a JV partner. Examples are the Dubai Exchange, AgoraX (ag OTC derivative platform in partnership with FC Stone), IDCG which is a clearing platform for OTC Interest Rate Swaps, and a multilateral trading facility in London to trade European equities.

Link to NASDAQ investor presentation for revenue breakdown: http://files.shareholder.com/downloads/NDAQ/508718992x0x258427/7df22b22-5ed8-4217-988c-9653c65030f1/Goldman%20Sachs%20121108%20Conference.pdf

Catalysts:

-The most likely catalyst is a surge in Nordic equity volumes. NASDAQ has an MOU with EMCF (a European Clearing firm of which they own 22%) to become the central counterparty for OMX equity transactions. Believe it or not, the Nordic equity markets are bilaterally cleared which has almost certainly limited volume growth. NASDAQ is improving the execution platform and adding a central counterparty, which should open the door to new participants.

-If NASDAQ reports meaningful market share gains on its London MTF, that market is big enough that investors would bid up the stock.

-An announcement of equity partners in IDCG would also excite investors given the size of that market.

-Incremental synergies from their OMX, PHLX and Boston exchanges. Management has indicated that total synergies will likely exceed the $150m they originally targeted.

Price:
I really liked NASDAQ under $23 when the markets were 15% lower. The stock is flirting with $23 again now so I would buy the stock. Consensus EPS for 2009 is about $2.20, so at $23 you get a solid company with real growth potential for just over 10x forward estimates.

Word of caution:
Although US equity execution fees only account for about 16% of total revenues, reports about US equity volume are likely to be the biggest contributor to short term volatility in the stock. I think predicting volumes is almost impossible and I don’t bother trying. Just be aware that volume data will move the stock around. This is not a trade, it is a stock I want to own for several years.