CME Earnings Preview: Interest Rate Derivatives, Market Data In Focus
CME Group (NASDAQ:CME) is scheduled to announce its first quarter earnings on Thursday, May 1. The Chicago-based exchange operator witnessed growth in its clearing and transaction-based revenues in all four quarters last year, indicating an increase in trading activity. The growth in clearing and transaction-based revenues was mainly due to a 22% year-on-year (y-o-y) increase in interest rate derivatives trading in 2013. [1]
We expect a continued increase in interest rate derivatives volumes this year, as well as volume growth for other asset classes such as energy and metals. Given that the average revenue per contract (RPC) earned by CME is relatively lower for interest rate products, even a slight increase in trading volumes of non-interest rate products should help the company improve revenues. Consequently, the company could improve its profitability, given the largely fixed nature of its expenses
Our $70 price estimate for CME’s stock is about in line with the current market price.
See our full analysis for CME Group
Interest Rate Products Key For The Quarter
In the last quarter of 2013, trading revenues generated by interest rate products were largely responsible for driving overall transaction-based revenues. Continuing the trend, CME’s average daily volume (ADV) for interest rate derivatives during Q1 2014 was up by 9% y-o-y, and the revenue realized per traded contract was up by over 4%. Trading activity across most other asset classes during the quarter remained relatively flat compared to the previous year period. [2]
Margins Could Improve In 2014
Interest rate products constitute nearly half of CME’s trading volumes. Interest rate products have a significantly lower RPC (about $0.50 per contract), compared to other derivatives such as energy (around $1.30), metals ($1.60), agricultural commodities ($1.30) and foreign exchange ($0.80). A growing mix of interest rate derivatives was partially responsible for a nearly 3% decline in EBITDA margins – to 65.7% – in 2013. We expect the trading activity for commodities and energy contracts to pick up as the year progresses, and slightly improve the margins from 2013. However, margins could remain compressed in the first quarter as the trading volumes of non-interest rate products have remained largely flat relative to Q1 2013.
Positive Signs For Market Data Revenue
Revenues generated by CME’s Market Data segment declined from about $390 million in 2012 to $315 million 2013. However, most of the decline was due to the sale of CME’s Credit Market Analysis business to McGraw Hill. CME’s data subscriber revenues increased by 14% y-o-y to $272 million. Moreover, the company announced a hike in its annual subscription fee from $70 to $85 starting 2014, and management doesn’t expect its subscriber base to fall as a result of the changes. [3] Going forward, we expect revenues generated by CME’s market data division to reach 2012 levels of around $380 million owing to the 20% price hike. However, we have a more conservative growth forecast for the long run.
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Notes:- CME Group Q4 2013 Earnings Call Transcript, Seeking Alpha, February 2014 [↩]
- CME Monthly Reports, CME Investor Relations, April 2014 [↩]
- CME Q3 2012 Earnings Call Transcript, Seeking Alpha, November 2013 [↩]