X: Future Earnings Momentum Will Drive Sector Outperformance Over Peers

Key Takeaways

• Expansion in derivatives, data analytics, and digital platform investments is driving higher-margin, recurring revenues and positioning the company for robust future growth.
  
• Globalization through acquisitions and international listings is diversifying income streams beyond Canadian equities, reducing volatility, and supporting sustained revenue growth.
  
• Shifts toward private funding, global competition, new technologies, cost pressures, and changing investor behavior could undermine TMX's traditional revenue streams and long-term earnings growth.

Catalysts

Operates exchanges, markets, and clearinghouses primarily for capital markets in Canada, the United States, the United Kingdom, Germany, and internationally.

• The strong momentum in derivatives trading and clearing-driven by increased investor demand for risk management tools amid global volatility, new product launches like the Canada Bank Credit Index Future, and ongoing electronification of markets-positions TMX to capitalize on growing cross-border capital flows, likely supporting higher future revenue and earnings growth.
  
• The accelerating expansion of TMX's Global Insights and Data Analytics division, including double-digit growth in recurring revenue segments like Trayport and VettaFi, is increasing high-margin, predictable income streams and improving overall net margins.
  
• TMX's strategic investments in digital platforms (e.g., post-trade modernization, cloud-based architecture for trading systems, and flexible marketplace technology) directly address the evolving landscape of digital assets and tokenization, providing a future-ready infrastructure and unlocking new sources of transactional and data revenue as digital securities adoption broadens.
  
• The ongoing globalization of TMX's business through acquisitions, international listings (notably the launch and rapid growth of AlphaX US), and cross-selling data/analytics solutions in Europe and North America, is diversifying revenues beyond Canadian equities, reducing earnings volatility, and setting the stage for sustained top-line growth.
  
• Increased activity and resilience in the ETF and capital formation segments, reflected by record ETF listings and robust secondary financings, demonstrates TMX's ability to capture growing demand from passive and algorithmic investors, which bodes well for elevated trading fees and listing revenues in future quarters.

TMX Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming TMX Group's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.9% today to 33.1% in 3 years time.
• Analysts expect earnings to reach CA$749.3 million (and earnings per share of CA$2.76) by about May 2029, up from CA$534.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 28.7x on those 2029 earnings, up from 26.7x today. This future PE is greater than the current PE for the CA Capital Markets industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

Risks

• Expansion of private markets and continued growth of alternative funding sources like private equity and venture capital could diminish the appeal and revenue potential of public market listings on TMX, leading to slower topline growth and weaker capital formation revenues.
  
• Ongoing globalization of capital markets, combined with intensifying competition from larger, more diversified international exchanges, may make it harder for TMX to win large IPOs and high-profile secondary listings, which could pressure core trading and listing revenues while impacting overall market share and earnings growth.
  
• Increasing adoption of blockchain technology, tokenized securities, and decentralized finance may bypass traditional exchange infrastructure and settlement systems in the medium-to-long term, threatening the foundational trading and clearing fee business and potentially compressing net margins over time.
  
• Signs of margin compression from rising operating expenses-driven by recent acquisitions, IT modernization, strategic realignment costs, and regulatory requirements-could eat into earnings and limit the ability to leverage revenue growth into consistent profitability improvement.
  
• Overreliance on established business lines such as equity and derivatives trading exposes TMX to risks from declining domestic trading volumes, fewer high-growth Canadian companies choosing to list publicly, or shifting investor preferences toward passive, low-fee products and alternative asset classes-all of which could constrain both revenue and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$64.44 for TMX Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$71.0, and the most bearish reporting a price target of just CA$58.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CA$2.3 billion, earnings will come to CA$749.3 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$51.59, the analyst price target of CA$64.44 is 19.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.