CME will see further rise, not in share prices but in profit

The share price has been rising since summer, coming back to life after years of underperformance (Bloomberg)

By Yasufumi Saito

CME group Inc., the world’s largest futures-exchange operator, has been gaining impetus since summer as its contract volume rose due to the high volatility in interest rates and energy markets. Analysts expect a further rise in volume, revenues and earnings, but not in the stock as it’s fully priced.

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Fifty-eight percent of analysts rate CME stock as “hold,” and another 32 percent rate is as “buy.” The target price by analysts is $97.69, below the current price, reflecting the skepticism on the additional rise since the stock prices have been previously hoisted by the company’s potent performance.

The outlook for the Chicago-based company’s business is basically bullish. The consensus estimate of earnings for the first quarter in 2015 is $326.88 million, or 97 cents per diluted share, up 16.9 percent from a year ago.

For the full year 2015, analysts forecast net income will rise 17.9 percent to $1.32 billion, or $3.92 per diluted share, from a year earlier, and sales will see a 9.2 percent increase to $3.4 billion.

But the share price has already gone up. On March 18, the stock price was at $98.99, 1.5 percent below its 52-week-high and 49 percent above its 52-week-low. The price-earnings ratio was 29.55, beating the S&P 500 Index’s 19.81.

The share prices have been rising since summer, coming back to life after years of underperformance (Bloomberg)

Richard Repetto, a principal at Sandler O’Neill & Partners L.P., raised his 2015 earnings-per-share estimate to $3.92 from $3.85 in his latest note, reflecting “the strong QTD volume environment.”

Average daily volume of contracts, a key figure as CME earns mostly from fees, has been kept high since summer.

“Recent changes in interest rate expectations and the sharp decline in energy prices led to the company having its second highest quarterly volume ever,” wrote Stephen Ellis, an analyst at Morningstar Inc., in his latest note.

The volume for the December quarter was 14.8 million, up 31 percent from 11.3 million a year ago. Interest rate contracts increased 41 percent to 7.4 million from 5.2 million a year earlier.

Average daily volume continued to spike to 15.8 million in February, up 13 percent from a year ago, an all-time high for the month.

“We think interest-futures should continue to benefit from speculation on the path of the economy,” said Ellis in the note, “as market participants adjust to the eventual end of the low-interest-rate era.”

Average daily volume at CME increased 31 percent in the fourth quarter, mostly by the growth of interest rate contracts (Yasufumi Saito/Medill)

As electronic trading became more popular, the company has tried to attract more foreign clients, in particular from Europe and Asia.

“Futurization and globalization are still some of the underlying long term growth trends beyond the near term increase in market volatility,” said Daniel Fannon, an equity analyst at Jefferies LLC., in his latest note.

“On the heels of a good start to volume in 2015, CME continues to look for new avenue of growth,” he wrote, recommending “buy.”

In the December quarter CME traded 3 million contracts per day from outside the U.S., which accounted for 24 percent of the daily volume, its highest level ever.

On March 10, CME agreed with the Taiwan Futures Exchange to consider collaboration regarding a potential listing those of U.S. equity index-based contracts.

“Despite the uncertainty in the trading environment,” Ellis said in the note, “we expect further volume gains at CME.”

The company operates the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and the Kansas City Board of Trade.

CME reported in February a profit of 95 cents per diluted share for the quarter ended Dec. 31, 2014, beating the analysts’ estimate of 92.9 cents.

CME will announce earnings for the first quarter of 2015 on April 30. An investor conference call will start at 7:30 a.m. Central time.

Photo at top: CME’s share prices have been rising since summer. (Bloomberg)