CME CME Group Inc

CME Group Inc. (CME) reported its first quarter earnings of $292 million or $4.36 per share, way ahead of the Zacks Consensus Estimate of $4.18. The earnings also surpassed the prior-year earnings of $240 million or $3.62 per share.

The improved result in the reported quarter was primarily attributable to strong volumes and robust revenues, which also led to solid bottom-line results.

The net operating earnings in the first quarter of 2011 excludes the $164 million benefit within tax expense associated with a change in the expected effective tax rate and its impact on the deferred tax expense and the release of reserves related to a foreign investment.

Including this benefit, net income in the first quarter was $457 million or $6.81 per share, as against $240 million or $3.62 per share in the prior-year quarter.

CME Group’s total revenue for the reported quarter increased 20% year over year to $832 million, exceeding the Zacks Consensus Estimate of $809 million.

The increase was primarily due to a surge in the average daily volumes across all asset classes. CME Group’s average daily volume jumped 19% year over year to 13.8 million contracts in the reported quarter.

However, total average rate per contract decreased 2% from the year-ago quarter to 80.8 cents. Although record volumes resulted in larger discounts, the relative stability in the rate per contract can be attributed to the strength of product mix with strong growth coming from energy and agricultural products.

CME Group’s clearing and transaction fees were hiked by 20% to $691 million, driven by higher interest rate volume and record revenue across agricultural commodities, energy and metals product lines.

In addition, revenue earned from market data and information services increased 22% year over year to $107 million and access and communication fee revenue increased 5.5% year over year to $11.5 million while other revenues increased 31% year over year to $21.8 million.

Total expenses increased 10% year over year to $307 million in the first quarter 2011. CME Group’s non-operating expense was $13 million in the first quarter of 2011, owing to interest expense and borrowing costs of $30 million, offset by $19 million of investment income.

Balance Sheet

As of March 31, 2011, CME Group had $719.3 million of cash and marketable securities, down from $905.4 million as of December 31, 2010. The company had $2.105 billion in long-term debt, marginally higher from $2.104 billion at the end of December 31, 2010.

As of March 31, 2011, CME Group had assets totaling $34.7 billion (down from $35.0 billion as of December 31, 2010) while total shareholders’ equity stood at $20.8 billion (down from $20.1 billion as of December 31, 2010).

Dividend Update

In February, 2011, CME Group’s board approved an increase in its dividend payout policy to approximately 35% of prior year’s cash earnings from approximately 30%. This would in turn result in an increase in regular quarterly dividend by 22% from $1.15 per share, earlier.

The hiked quarterly cash dividend of $1.40 per share was paid on March 25, 2011 to shareholders of record as on March 10, 2011.

Peer Groups

CME Group’s rival NASDAQ OMX Group Inc. (NDAQ) has reported its 2011 first quarter operating earnings per share of 61 cents on April 20, a penny higher than the Zacks Consensus Estimate of 60 cents and significantly higher than the prior-year quarter earnings of 43 cents.

Another competitor, NYSE Euronext, Inc. (NYX) will report its first quarter of 2011 earnings on the same day, while IntercontinentalExchange, Inc. (ICE) is scheduled to report on May 4.

Our Take

Although operating cash flow remained strong, long-term debt obligations expose CME Group to financial risk. Additionally, interest rate volatility and rising competition pose an operational risk to the company.

Yet we believe that a gradual economic recovery and stable debt ratings are expected to drive volumes further. Moreover, the company’s efforts to promote, expand and cross-sell its core exchange-traded business through meaningful acquisitions, a strong portfolio along with its global presence will generate decent growth in the long run.

 
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