CME Group Inc.'s Chicago Board of Trade

CME Group Inc. holding strong to steady

By Steven Porter

Locked in heated competition for dominance in the futures exchange marketplace, CME Group Inc. is poised to stand its ground.

Sixteen of the 18 analysts surveyed by Bloomberg recommend buying or holding onto CME stock, eight saying buy.

Morningstar Equity Research published a report last fall expecting CME to enjoy an increase in trade volume amid continued interest in the derivatives market. Earlier this month, the company announced that 2015 had brought a record trading volume of 14 million contracts per day, up 2 percent over the previous year.

Michael Wong, a Morningstar analyst, explained that CME is “exceptionally well positioned” compared to competitor Atlanta-based Intercontinental Exchange Inc.

“Commodity prices have been moving relatively violently since the beginning of the year,” Wong said. “That can lead to tons of volatility and trading levels.”

Although the impact of the Federal Reserve’s recent interest rate hike is less direct than it would be for retail brokerages or banks, CME stands to exercise a competitive advantage as rates probably continue to rise.

“There is still tons of uncertainty over the cadence at which those interest rates would rise,” Wong said. “Since the beginning of the year, many people have probably dialed back their expectations over how quickly the Federal Reserve will increase their short-term Fed funds rate, due to factors such as global economic growth or lower inflation expectations.”

Since many people predict commodity prices could stay low for a while, there’s less of a need to hedge on the downside, Wong said.

Stock prices past 12 months

CME Group Inc. share price history
A share of CME Group Inc. has neared $100 three times over the past year. (Source: Yahoo! Finance)

 

In fact, it’s CME stock that might warrant a downside hedge, according to one observer. Writing for TheStreet Inc., Bruce Kamich argued that it’s time for investors to hedge against CME shares following a multi-year price plateau.

“There were at least three upside tests of the $100 level last year and they all failed,” Kamich wrote. “The dips to or toward $85 were bought.”

After their most recent peak near $100 last month, CME shares closed Monday at $84.64. And they could tumble as low as $70 in the long term, Kamich argued.

As of mid-day Tuesday, it was trading at 22.6-times its trailing 12 months earnings, compared to 17.0 price-earnings ratio exhibited by the Standard & Poor’s 500 Index stocks.

On average, analysts surveyed by Yahoo Finance predict CME will finish 2015 with $3.33 billion in net income, then increase 7.5 percent to $3.58 billion in 2016. That would translate to earnings of $3.85 per diluted share in 2015 and $4.26 in 2016.

CME Group Inc. earnings estimates

CME Group earnings estimates 2015-2016
Analysts surveyed by Yahoo! Finance predict CME Group Inc.’s earnings will increase from $3.85 per diluted share in 2015 to $4.26 in 2016. (Design used Piktochart.com and Creative Commons elements from Deluge, Adam “Dser” and GDJ.)

 

The company’s next scheduled earnings release is Feb. 5, when analysts expect to see earnings of 90 cents per diluted share for the fourth quarter, down from 95 cents per share reported for the same period a year prior.

Earnings are expected to climb to $1.03 in the first quarter, beating the year-earlier 98 cents.

In addition to short-term profit predictions, CME is expected to experience continued organic growth after its 2014 acquisition of an exchange in London, and it’s the ongoing beneficiary of financial reforms enacted in 2010, Wong noted.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, among other things, required that certain swaps be cleared in exchanges.

“Before then, people always just looked at them as a place to actually execute transactions, but now you can look at the exchanges as a place to clear transactions that actually did not occur on the exchange,” Wong said. “Definitely, that has been a growth driver of the exchanges in the past several years and will continue to be.”

Many transactions that previously took place outside the exchanges are now resulting in revenue for CME, which could continue benefiting from the Dodd-Frank business booster, Wong added. “It’s still in the early to middle innings of this playing out,” he said. “There’s still lots of potential clients that likely have not set up the systems to go through these clearing houses.”

Photo at top: CME Group Inc., which owns and operates the Chicago Board of Trade (pictured here), is expected by analysts to fare well in the foreseeable future. (Ken Lund/Creative Commons)