CME’s Q2 Performance To Be Driven By High Trade Volumes

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CME Group (NASDAQ:CME) is scheduled to announce its Q2 earnings on Thursday, July 30. [1] The global exchange operator has witnessed a 6% year-over-year rise in trading volumes in Q2 to 13.3 million contracts traded per day. Growth was largely driven by trading of energy derivatives, agricultural commodities and foreign exchange futures and options. On the other hand, trade volumes of interest rate, metals and equities derivatives remained unimpressive through the quarter. [2]

CME reported a 8% year-over-year rise in net revenues to $843 million in the first quarter of 2015. Growth was largely driven by an increase in trading activity through the quarter, due to which clearing and transaction fee revenues grew by nearly 9% y-o-y to $708 million. Furthermore, market data revenues registered 10% growth over the prior year quarter to $98 million in Q1. [3]

We have an $87 price estimate for CME’s stock, which is about 10% lower than the current market price.

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See our full analysis for CME Group

Trading Activity Across Key Asset Classes

Interest rate derivatives contributed to over half the total contracts traded on CME’s trading platforms through 2014 and Q1’15. [4] Needless to say, interest rate derivative trading is crucial to CME’s overall performance. The average daily volumes (ADV) of interest rate derivatives stood at 6.6 million contracts traded per day during the June quarter, which was about 1% lower than the comparable prior year period. Volumes were extremely low in April, which subsequently picked up in May prior to the Fed announcement confirming that interest rates will rise in late 2014. [5] Volumes recovered in June following a statement released by the IMF suggesting that the Fed should hold off raising rates this year. [6] We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 6% higher than the prior year at 7.4 million contracts per day.

Trading activity for energy products was high in late 2014 owing to the volatility across oil prices, which helped the exchange operator in terms of the trading of natural gas and oil contracts. Subsequently, CME announced the launch of European natural gas contracts on its CME Europe in addition to the existing rise in trading volumes of energy contracts. [7] As a result, energy derivatives volumes were strong through the first quarter, with an average of 2.1 million contracts traded per day. Although ADV fell sequentially to about 1.7 million contracts traded per day in Q2, volumes were still about 20% higher than the comparable prior year period. [2] We currently forecast the average daily volume of energy contracts on CME’s platform to be about 1.7 million contracts for the full year. In the long run, we forecast energy contracts to average 2 million per day by the end of the decade.

After suppressed foreign exchange (FX) derivatives trading volumes through the first three quarters of 2014, volumes picked up in the fourth quarter due to the growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank. [8] As a result, FX derivatives trading volumes stood at about 1 million contracts traded per day in the December quarter. CME has witnessed a sustained period of high FX trading through 2015 thus far. The company averaged 954,000 trades per day in Q1, which was 17% higher on a y-o-y basis. The trend continued in Q2, with the ADV for FX derivatives through Q2 standing at 903,000 trades per day, which is about 43% higher compared to the prior year period. We forecast FX trading volumes for the full year to be about 10-15% higher than 2014 levels at about 880,000 trades per day.

Margins Could Continue To Improve Through 2015

According to our estimates, CME’s adjusted EBITDA margin in Q1 improved by over 60 basis points over the prior year period to about 68.5%. Since most expenses incurred by exchanges are fixed in nature, the rise in trading activity translated to healthier margins for the exchange operator. If CME can sustain high volumes in the coming months as well, it could have a positive impact on its revenues as well as margins. We currently forecast CME’s adjusted EBITDA margin to improve by a percentage point over 2014 to 67.1% for the full calendar year 2015, and subsequently to rise to over 70% through the end of our forecast period.

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Notes:
  1. CME Group Announces Second-Quarter 2015 Earnings Release, CME Press Release, June 2015 []
  2. CME Group Volume Averaged 14.6 Million Contracts per Day in June 2015, CME Press Release, July 2015 [] []
  3. CME Group Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  4. CME Group Monthly Trade Metrics For May, CME Group Investor Relations, June 2015 []
  5. Janet Yellen says interest rate hike ‘will be appropriate’ later this year, The Guardian, May 2015 []
  6. IMF’s Christine Lagarde to Janet Yellen: Please don’t raise interest rates, Fortune, June 2015 []
  7. CME Group Announces the Launch of a Suite of European Natural Gas Contracts on CME Europe, Market Watch, December 2014 []
  8. CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 []