Trading On margin

CME Group shares are trading 13% below their fair value


[Updated 09/16/2021] Update of the CME group assessment

CME Group actions (NASDAQ: CME) has gained a measly 4% year-to-date, and at its current price of $ 189 per share, it is trading 13% below its fair value of $ 216 – Trefis estimate for Valuation of the CME Group. The stock has lost around 11% since its second quarter 2021 results in July, despite outperforming consensus estimates for both revenue and earnings. It reported net income of $ 1.18 billion, which is slightly lower than the previous year. This could be mainly attributed to a slight decrease in clearing and transaction costs, partially offset by an 8% growth in data and market information services. Clearing and transaction costs suffered from a 12% and 24% year-over-year decline in equity indices and average daily metal volume (ADV), respectively. This removed the positive effect of a 25% increase in ADV interest rates. In addition, the average rate per contract also saw a slight decrease due to a change in the product mix. On the flip side, the company reported 1% year-on-year growth in net income to $ 511 million, driven by some decrease in operating expenses.

The company reported 2020 revenue of $ 4.9 billion, slightly higher than in 2019. This was due to some negative growth in clearing and transaction fees. While all of CME’s peers benefited from higher market volatility in 2020, leading to growth in clearing and transaction costs, CME suffered from a decline in ADV in interest rate contracts. and a decrease in the average rate per contract. The same trend continued in the first quarter of 2021, with total ARV down 19% year-on-year. However, ADV saw some recovery in the second quarter year-on-year. Going forward, we expect the company to experience stagnant growth in clearing and transaction fees. While non-commercial income is expected to experience some growth during the year, the CME Group turnover are expected to remain around $ 4.9 billion – the same level as the previous year. Despite stagnant revenues, the company’s profitability figures are expected to improve in fiscal 2021 – net profit is expected to grow 14% year-over-year to $ 2.4 billion. This will likely result in EPS of around $ 6.61 in fiscal 2021. This, coupled with a P / E multiple just below 33x, will lead to a valuation of $ 216.

[Updated 07/26/2021] What to expect from CME group shares in the second quarter?

CME Group actions (NASDAQ: CME), the world’s largest financial derivatives exchange, gained around 18%, from around $ 182 at the start of 2021 to around $ 216 currently, outperforming the S & P500, which rose 12% over the course of the year. from the same period. The stock market has beaten consensus estimates over the past two quarters, mainly driven by strong growth in ADV (Average Daily Volume) on a sequential basis. This sparked positive investor interest in the stock.

There were two main reasons behind the rise in the ADV on a sequential basis: First, the approval of the $ 1.9 trillion stimulus package. Second, the increased participation of retail investors.

But is that all there is in the story?

Not quite, despite recent gains, Trefis estimates Valuation of the CME Group at around $ 212 per share – slightly below the current market price, based on a key opportunity and risk factor.

The opportunity we see is an improved trajectory for CME Group turnover during the following quarters. The company reported revenue of $ 4.9 billion for full year 2020, which is slightly higher than in 2019. Growth was limited due to a slight drop in fees compensation and transaction, which constitute more than 80% of its income. Clearing and transaction fees for CME suffered in 2020, unlike its counterpart NASDAQ, due to declining year-over-year contract volumes due to lower ADV in contracts from interest rate. In addition, its average rate per contract also declined slightly during the year.

The exchange posted better-than-expected results in the first quarter of fiscal 2021. CME reported total net revenue of $ 1.25 billion, down 18% from a year ago. This could be mainly attributed to a 21% drop in clearing and transaction costs. While ADV has increased on a sequential basis, it has decreased year over year – ADV in the first quarter was down 19% year-over-year. The decline is the result of lower volatility compared to the first quarter of 2020, as economic uncertainty regarding government policy and its impacts has diminished. That said, trade volumes are expected to normalize as economic conditions recover. But that might take some time. Overall, we expect CME’s revenue to reach $ 5.1 billion in fiscal 2021, 4% ahead of the 2020 figure.

The adjusted net margin is expected to improve somewhat in fiscal 2021, from 43.1% to 49.1%. As a result, the company’s net profit is expected to increase 18% year-over-year to $ 2.5 billion, leading to EPS of $ 6.94. EPS of $ 6.94, coupled with a P / E multiple just below 31x, will lead to a valuation of around $ 212.

Finally, how much should the market pay per dollar of CME Group profit? Well, to make almost $ 6.94 a year from a bank today, you would have to deposit around $ 694 into a savings account, which is roughly 100 times the desired earnings. At the current CME stock price of around $ 216, we’re talking about a P / E multiple of close to 31x. And we think a number around that amount will be appropriate.

That said, a financial exchange is still a risky proposition. While growth is likely, a change in current market sentiment can hurt the near-term outlook. What is behind this?

CME is heavily dependent on clearing and transaction fees, which in turn are dependent on ADV. ADV has benefited from increased participation from retail investors in recent quarters. Although the participation of retail investors has increased significantly, it should also be noted that they do not have a great loss capacity. Therefore, an unexpected correction in the market price can result in substantial losses for them, push them into bankruptcy and adversely affect trading volumes. To sum up, we think CME Group’s stock is slightly overvalued.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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