An uncertain global economic environment largely impacted by the European debt crisis and near zero interest rates in the U.S. took a toll on CME Group’s (NASDAQ:CME) performance for the second quarter as revenues dropped 5% year-on-year to $796 million.  The average daily volume (ADV) of contracts traded was reported at 12.4 million, down 9% from the second quarter of 2011. However, June showed a few signs of optimism as the ADV increased to 13.1 million, reversing the prior month’s trend. We discuss below a few key takeaways that will have the most impact on the company’s stock.
Interest Rate Contracts The Most Affected
Interest rate contracts are a key component of CME’s operations, accounting for 20% of its stock value, according to our analysis. This division suffered a major blow as the Federal Open Market Committee indicated that short-term interest rates will be kept near zero till 2015.  Trade volumes declined 20% from the prior year as investors lost confidence. We expect CME to decrease transaction fees in the future to attract investors in the near future.
Energy Contracts Boosted By New Platform
Energy contracts, which account for 21% of our price estimate for CME, were boosted by the launch of the CME Direct platform for energy trading in June. (See CME Looks To Boost Energy Contract Volumes With New Platform) Although the ADV for the whole quarter was down 1% from 2011, the post-launch period in July saw a 9% increase in trade volumes. The new platform allows simultaneous trading of exchange-listed and OTC products and will attract customers looking to put money into the market. We expect energy contract trade volumes to increase at a healthy rate through the Trefis forecast period.
Agriculture And Metals
Agricultural commodities were boosted by the extended timings for trading as volumes increased 11% over 2011. (See CME Extends Trading Hours for Grains and Oilseeds To Attract More Customers) Severe drought conditions in the Midwest led to higher volatility, driving volumes. Metal trade volumes, although down 8% versus last year, were up 9% in June. Copper, which represents 21% of metal trading, was the most encouraging base metal as trade volumes increased 57% compared to the second quarter of 2011. Gold also increased by 11%. We expect a steady rise in commodity & metal trading contracts, which account for 19% of our price estimate for CME’s stock, over the next few years.
The U.S. Commodity Futures Trading Commission (CFTC) is finalizing the mandate for OTC clearing. This presents a significant revenue potential for CME. The company has cleared $700 billion across OTC financial products to date, with $554 billion in rate swap and another $138 billion in credit default swaps and is in a prime position to benefit from the mandate. We will keep a close eye on the developments in this field as they unfold. CME has also unveiled plans to launch the CME Globex platform for advance order entry and market data in the third quarter of this year.
Our $57 price estimate on CME Group’s stock is about 10% above the current market price. You can gauge the impact of a change in our forecast by modifying the charts above.Notes:
- CME Group Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 26th July, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]