Neutral on CME Group - Analyst Blog
July 19 2011 - 7:15AM
Zacks
CME Group Inc.’s (CME) offers a diverse
derivative-product line that is expected to drive volumes.
Moreover, the company’s efforts to promote, expand and
cross-sell its core exchange-traded business through strategic
alliances, meaningful acquisitions, newer product initiatives along
with its global presence will generate a decent growth in the long
run.
However, these positives are somewhat dwarfed by debt
obligations that stood at a cautious level, posing ample
financial risk. Additionally, interest rate volatility and rising
competition pose an operational risk to the company. We thus retain
our “Neutral” recommendation on the company.
Counting on the positives, CME Group continues to post modest
average volumes with significant growth across the entire product
spectrum. Currently, CME holds 98% market share of the U.S. futures
trading with a clearing house notional value of $30 trillion.
Additionally, investments in initiatives such as Swapstream,
BM&F, CMA and FXMarketSpace are also projected to boost average
daily volumes.
Also, increased electronic trading volume adds scalability (and
hence leverage) to CME Group’s operating model and has also helped
the company maintain an operating margin of over 60% coupled with
consistent bottom-line growth.
The company also intends to execute its global growth strategy
in the important emerging markets of Europe, Asia and Latin
America.
On the flip side, the trading activity is inherently variable,
both seasonally and cyclically. However, many of
CME Group’s costs are fixed. Further, CME Group’s
diversified product portfolio is significantly exposed to extreme
interest rate volatility, firm government regulations and limited
credit availability in the current unstable capital and credit
market.
CME Group’s first quarter earnings surpassed the Zacks Consensus
Estimate on strong volumes and robust revenues. However, earnings
were hit by higher operating, interest and tax expenses coupled
with reduced average rate per contract.
Over the last 7 days, 1 out of 18 analysts covering CME Group
raised the estimate while 1 analyst lowered the estimate for the
second quarter of 2011. For 2011, 1 out of 20 analysts covering the
stock raised the estimates over the last 7 days. Over the last 30
days, 4 analysts raised the estimates while 5 nudged the estimates
downward. For 2012, 3 out of 20 analysts raised the estimates while
only 1 lowered the estimate.
The Zacks Consensus Estimate for second quarter 2011 is $4.16
per share. For full years 2011 and 2012, the Zacks Consensus
Estimates are $16.85 and $19.39 per share, respectively.
The quantitative Zacks #3 Rank (short-term Hold rating) for the
company indicates no clear directional pressure on the stock over
the near term.
Headquartered in Chicago, Illinois, CME Group is the largest
futures exchange in the world in terms of trading volume as well as
notional value traded. It competes with CBOE Holdings,
Inc. (CBOE) and Nasdaq OMX Group Inc.
(NDAQ).
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