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Isabel Zhong/ MEDILL

CME group stock tumbled close to 3 percent on Thursday.


CME stock tumbles after earnings droop

by Isabel Zhong
Oct 25, 2012


CME Group Inc., the largest operator of U.S. futures exchanges, announced mixed third-quarter results Thursday as weak trading activity weighed down revenue. Earnings fell 31 percent but met analyst expectations. The company’s stock fell close to 3 percent.

Chicago-based CME Group earned $218 million, or 66 cents per diluted share, down 31 percent from $316.1 million a year ago. Earnings per diluted share in the third quarter of 2011 were $4.74, or 95 cents after adjusting for a five-for-one stock split in May.

CME Group took a $176.9 million one-time charge related to deferred income tax liabilities from its acquisition of Pivot Inc., a liquidity management software firm. On an operating basis, the company earned $396 million, or 70 cents per diluted share, which matched the forecast of 70 cents per share by analysts surveyed by Bloomberg.

“I think there was a mix of positives and negatives,” said Paul Gulberg, an analyst with financial research firm Portales Partners LLC in New York. “There were issues with its core products not getting enough volume, but there are opportunities for it to grow next year and beyond.”

Total revenue for the operator of the Chicago Mercantile Exchange and the Chicago Board of Trade plummeted 23 percent to $683.2 million from a record $874.2 million a year ago. The decline was mainly caused by a 23 percent drop in clearing and transaction fees, the company’s main source of income.

Although fees per contract increased from 78 cents to 82 cents, third-quarter average daily volume shrunk 26 percent to 10.8 million contracts from 14.7 million contracts a year ago. A series of poor monthly trading-volume data released by CME Group during the third quarter had foreshadowed the weakness.

According to Gulberg, a drop in volatility suppressed the market’s appetite for futures and options contracts. “A lot of what drives activity in the derivatives market is volatility,” Gulberg said. “When the volatility picks up, people get in to hedge their positions, but when there is no volatility, people sit on their hands.”

August 2011 was a highly volatile month but that wasn’t repeated in the same month this year, he said.

Looking forward, company executives are seeking to boost the bottom line by taking advantage of recent regulatory changes. CME Group is strengthening its swap clearing capabilities as Wall Street reforms force the migration of over-the-counter swaps to regulated exchanges. According to UBS analyst Alex Kramm, this alone could bring in $500 million of additional annual revenue for the company.

The company is planning to open its first non-U.S. exchange in London next year to better cater to European-based traders. Closer to home, it is looking to cement its dominance in the grains futures market with a $126 million cash acquisition of the Kansas Board of Trade, a small but strategically important player in agricultural commodities.

“I think opening an exchange is very important and probably overdue because the CME deals a lot in energy, and the bulk of the volume and the clientele for energy is in London,” Gulberg said.

However, Gulberg thinks the KBOT acquisition is “not going to do much” for the CME Group’s revenue. “It’s only going to add a fraction of a percentage point to daily volume,” Gulberg said.

For the first nine months, CME Group earned $729.5 million, or $2.20 per diluted share, down 32 percent from $1.07 billion, or $3.19 per diluted share, a year ago. Revenues shrunk 11 percent to $2.25 billion from $2.54 billion last year.

The company’s stock closed at $55 Thursday, down $1.55 or 2.74 percent.CME Group Inc., the largest operator of U.S. futures exchanges, announced mixed third-quarter results Thursday as weak trading activity weighed down revenue. Earnings fell 31 percent but met analyst expectations. The company’s stock fell close to 3 percent.

Chicago-based CME Group earned $218 million, or 66 cents per diluted share, down 31 percent from $316.1 million a year ago. Earnings per diluted share in the third quarter of 2011 were $4.74, or 95 cents after adjusting for a five-for-one stock split in May.

CME Group took a $176.9 million one-time charge related to deferred income tax liabilities from its acquisition of Pivot Inc., a liquidity management software firm. On an operating basis, the company earned $396 million, or 70 cents per diluted share, which matched the forecast of 70 cents per share by analysts surveyed by Bloomberg.

“I think there was a mix of positives and negatives,” said Paul Gulberg, an analyst with financial research firm Portales Partners LLC in New York. “There were issues with its core products not getting enough volume, but there are opportunities for it to grow next year and beyond.”

Total revenue for the operator of the Chicago Mercantile Exchange and the Chicago Board of Trade plummeted 23 percent to $683.2 million from a record $874.2 million a year ago. The decline was mainly caused by a 23 percent drop in clearing and transaction fees, the company’s main source of income.

Although fees per contract increased from 78 cents to 82 cents, third-quarter average daily volume shrunk 26 percent to 10.8 million contracts from 14.7 million contracts a year ago. A series of poor monthly trading-volume data released by CME Group during the third quarter had foreshadowed the weakness.

According to Gulberg, a drop in volatility suppressed the market’s appetite for futures and options contracts. “A lot of what drives activity in the derivatives market is volatility,” Gulberg said. “When the volatility picks up, people get in to hedge their positions, but when there is no volatility, people sit on their hands.”

August 2011 was a highly volatile month but that wasn’t repeated in the same month this year, he said.

Looking forward, company executives are seeking to boost the bottom line by taking advantage of recent regulatory changes. CME Group is strengthening its swap clearing capabilities as Wall Street reforms force the migration of over-the-counter swaps to regulated exchanges. According to UBS analyst Alex Kramm, this alone could bring in $500 million of additional annual revenue for the company.

The company is planning to open its first non-U.S. exchange in London next year to better cater to European-based traders. Closer to home, it is looking to cement its dominance in the grains futures market with a $126 million cash acquisition of the Kansas Board of Trade, a small but strategically important player in agricultural commodities.

“I think opening an exchange is very important and probably overdue because the CME deals a lot in energy, and the bulk of the volume and the clientele for energy is in London,” Gulberg said.

However, Gulberg thinks the KBOT acquisition is “not going to do much” for the CME Group’s revenue. “It’s only going to add a fraction of a percentage point to daily volume,” Gulberg said.

For the first nine months, CME Group earned $729.5 million, or $2.20 per diluted share, down 32 percent from $1.07 billion, or $3.19 per diluted share, a year ago. Revenues shrunk 11 percent to $2.25 billion from $2.54 billion last year.

The company’s stock closed at $55 Thursday, down $1.55 or 2.74 percent.