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Max Frumes/MEDILL REPORTS
The Chicago Board of Trade, owned by CME Group Inc.
CME Group beats expectations despite lower revenues
by Max Frumes
Oct 29, 2009
Earnings were up 19 percent to $202 million, or $3.04 per diluted share, from $169 million, or $2.81 a share, last year.
The results included reductions in net income of $21 million for an impairment charge for the investment in IMAREX, a Norwegian-based freight and energy exchange, and merger-related items.
Omitting these items, analysts estimated adjusted earnings per share of $3.29, which the company beat with $3.35 per share.
CME, which runs futures and options exchanges for commodities and financial products, had revenues of $650 million, down from $681 million in the same quarter last year.
The stock shot down 5 percent to start the day, most likely on Wednesday's news that the Saudis were moving away from a New York Mercantile Exchange benchmark for oil, the West Texas intermediate crude contract. Such a shift, news reports said Thursday, could erode the trading of that contract on the NYMEX, which CME acquired in 2008.
Saudi Aramco announced Wednesday on its Web site that it would begin using the Argus Sour Crude Index as the benchmark price for all grades of crude oil sold to U.S. customers.
But the fears seemed to pass during Thursday's trading and the stock closed at $313.77, up $5.75 from Wednesday's close.
“Ultimately people are just moving past [Saudi Aramco’s announcement],” observed Patrick O’Shaughnessy of Raymond James & Associates Inc., as the stock ticked higher. “It’s kind of a ho-hum quarter.”
Rick Redding, CME’s managing director of products and services, said in a conference call with analysts that the reaction to the Saudi announcement was expected, and it would give CME a chance to launch other products. Also, he said, it would force the West Texas crude settlement to 2 p.m., which the exchange prefers.
“This was in a weird way, I think, a benefit for the product,” Redding said.
Chris Allen, managing director at Pali Capital Inc., who had questioned Redding during the conference call, confirmed in a later interview that he checked out Redding's assessment after the call with IntercontinentalExchange Inc., the Atlanta-based futures exchange, and it concurred with Redding’s view.
Worst case scenario, Allen said, is that the CME and ICE develop a new futures product and the volumes are just shifted from the old contract to the new.
Still more likely, he said, was that volume would increase by arbitrage between the two.
“I’m not too worried about the impact on volumes,” he said.
CME shares' bad start Thursday may also have been because “few new revenue opportunities were identified,” according to a note from Jon Castelyn of Susquehanna Financial Group LLP, a subsidiary of Susquehanna International Group LLP.
“The exchange is managing expenses well and ... forward EPS numbers have an upward bias on market data increases and general cost management," Castelyn wrote.
Analyst Mark Lane of William Blair & Company LLC, in Chicago, reaffirmed his believe that CME's trading volume will increase in 2010, and that could include volumes of interest rate products, which had been the product category most adversely affected by financial stress over the past 12 months.
“For interest rate volume levels to pick up more meaningfully in 2010, the Fed does not have to move off its zero-interest-rate policy," Lane wrote in a note. "Market participants just have to change their views regarding when the Fed may move — that could happen at any time over the next few months depending on the magnitude and pace of any economic recovery."
In the nine months ended Sept. 30, CME earned $623.2 million, or $9.37 per diluted share, down from $653.million, or $11.61 per diluted share, in the year-earlier period. But revenues rose to $1.94 billion from $1.87 billion.
