CME CME Group Inc

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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