• If you are wondering whether Intercontinental Exchange at around US$142 per share offers good value today, the key is to separate short term price moves from what the fundamentals suggest.
• The stock has pulled back recently, with the price down about 5.5% over the past week, 8.0% over the past month, 11.0% year to date and 19.7% over the past year, even though the 3 year and 5 year returns sit at 36.4% and 36.7% respectively.
• These swings are drawing fresh attention to how the market is currently pricing Intercontinental Exchange relative to its longer term track record and role in global markets. For investors, that makes it especially important to check whether recent sentiment shifts are aligned with the underlying business profile and balance sheet strength.
• Simply Wall St's valuation checks currently give Intercontinental Exchange a valuation score of 3 out of 6. Next is a closer look at what different valuation approaches say about the stock and how a more complete framework can give you an even clearer picture by the end of this article.

Approach 1: Intercontinental Exchange Excess Returns Analysis

The Excess Returns model looks at how much profit a company is expected to earn above the return that shareholders require, then capitalizes those surplus profits into an estimated value per share.

For Intercontinental Exchange, the starting point is a Book Value of $52.08 per share and a Stable EPS of $8.66 per share, based on weighted future Return on Equity estimates from 5 analysts. The Average Return on Equity sits at 15.45%, while the required return for shareholders, expressed as the Cost of Equity, is $4.66 per share.

The difference between what shareholders require and what the company is expected to earn is an Excess Return of $4.00 per share. That excess is projected on a Stable Book Value of $56.06 per share, which is based on weighted future Book Value estimates from 3 analysts. Putting these inputs together, the Excess Returns model arrives at an estimated intrinsic value of about $139.73 per share.

With a share price around $142, the model implies Intercontinental Exchange is roughly 1.9% overvalued, which is a very small gap.

Result: ABOUT RIGHT

Intercontinental Exchange is fairly valued according to our Excess Returns, but this can change at a moment's notice. Track the value in your watchlist or portfolio and be alerted on when to act.

Approach 2: Intercontinental Exchange Price vs Earnings

For a profitable company, the P/E ratio is a straightforward way to see how much investors are paying for each dollar of earnings. It links directly to what you, as a shareholder, ultimately care about, the earnings that support dividends and reinvestment.

What counts as a “normal” or “fair” P/E depends on how the market views a company’s growth prospects and risk. Higher expected growth or lower perceived risk can support a higher P/E, while slower growth or higher risk usually call for a lower one.

Intercontinental Exchange currently trades on a P/E of about 20.5x. That sits below the Capital Markets industry average P/E of about 39.5x and below the peer group average of around 26.3x. Simply Wall St’s Fair Ratio for Intercontinental Exchange is 16.4x, which is its proprietary view of what the P/E “should” be given factors such as earnings growth, industry, profit margins, market cap and specific risks.

This Fair Ratio is more tailored than a simple peer or industry comparison because it adjusts for those company specific drivers rather than assuming one size fits all. Compared with the actual P/E of 20.5x, the Fair Ratio suggests the stock is somewhat overvalued on this measure.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Intercontinental Exchange Narrative

Earlier, it was mentioned that there is an even better way to understand valuation. Narratives are introduced here as a simple way for you to write the story behind your numbers, linking your view on Intercontinental Exchange to specific forecasts for revenue, earnings and margins, then to a Fair Value that you can easily compare with today’s price on Simply Wall St’s Community page. On that page, millions of investors share views that update automatically as news or earnings arrive. One investor might build a bullish Intercontinental Exchange Narrative that lines up with the higher analyst price target of US$251.0, while another might prefer a more cautious Narrative closer to the lower target of US$174.0. Seeing those different Fair Values side by side can help you decide whether the current price feels high, low or about right for your own assumptions.

Do you think there's more to the story for Intercontinental Exchange? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.