Energy, Commodity Derivative Trade Volumes To Drive CME’s Q3 Earnings
CME Group (NASDAQ:CME) is scheduled to announce its Q3 earnings on Thursday, October 29. [1] The global exchange operator has witnessed a solid 7% annual growth in trade volumes through the September quarter to 14.4 million contracts trade per day. All asset classes have seen elevated trade volumes with the exception of interest rate derivatives, which fell by about 7% y-o-y to 6.7 million contracts traded per day. [2] In the most recent quarter, CME reported a 6% year-over-year rise in trading volumes to 13.3 million contracts traded per day. As a result, trading commission revenues were up by 12% y-o-y to $682 million, driving much of the overall growth through Q2.
We have a $91 price estimate for CME’s stock, which is in line with the current market price. CME’s stock price fluctuated between $87 and $100 through the September quarter.
See our full analysis for CME Group
Trading Activity Across Key Asset Classes
CME averaged 14.4 million contracts traded per day in Q3, which was about 7% higher than the year-ago period. This was similar to the 10% and 6% annual growth in trade volumes witnessed by CME in Q1 and Q2, respectively. Interest rate derivatives contributed to over half the total contracts traded on CME’s trading platforms in the last couple of years. 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 6.7 million contracts traded per day during the September quarter, which was about 7% lower than the comparable prior year period. Volumes were extremely low in September, after the Fed indicated that interest rates will not rise this year. [3] We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 6% higher than the prior year at 7.5 million contracts per day.
Trading activity for energy products has been high since the fourth quarter of last year, owing to volatility in oil prices, which helped the exchange operator in terms of natural gas and oil contract trading. At the time, CME also announced the launch of European natural gas contracts on its CME Europe in addition to the rise in trading volumes of energy contracts. [4] As a result of the addition of natural gas contracts and continued volatility in oil prices, trade volumes for energy derivatives stayed over 2.1 million contracts traded per day through the March quarter, which was about 25% higher than the comparable year-ago period. Although the average daily volume subsided to about 1.7 million contracts per day through Q2’15 thus far, it was still over 20% higher than prior year levels. Volumes have picked up again in Q3, with the ADV rising to just under 2 million contracts per day through the quarter – 26% higher than prior year levels. We currently forecast the average daily volume of energy contracts on CME’s platform to rise to over 2.2 million per day by the end of our forecast period.
After suppressed foreign exchange (FX) derivatives trading volumes in the first half of 2014, volumes picked up in Q4’14 due to growing speculation about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [5] As a result, FX derivatives trading volumes stood at just under 1 million contracts traded per day in the December quarter. Since then, CME has witnessed a sustained period of high FX trading. The company averaged 954,000 trades per day in Q1, which was 17% higher on a y-o-y basis. CME reported an ADV of 903,000 trades per day in Q2, which was a massive 43% rise over the comparable prior year quarter. High trading activity for FX derivatives has continued in Q3 as well, with an average of 890,000 trades per day through August – a 33% year-over-year increase. Although trade volumes remained high in September at 947,000 trades per day, volumes were about 18% lower than the previous year period owing to tougher year-over-year comparisons. Resulting Q3 average volume stood at 855,000 trades per day, which was a 7% annual increase.
Revenue Growth Could Translate To Higher Margins
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%. Similarly, the adjusted EBITDA margin in Q2 improved by over 250 basis points over the prior year period to about 67.5%. Since most expenses incurred by exchanges are fixed in nature, the rise in trading activity translated to healthier margins for the exchange operator. Given the robust volume growth through Q3, we are currently optimistic about the full year forecast for CME’s EBITDA margin. We forecast the adjusted EBITDA margin to improve by over two percentage points over 2014 to 68.7% for the full calendar year 2015, and subsequently to rise to over 70% through the end of our forecast period.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- CME Group Announces Third-Quarter 2015 Earnings Release, CME Press Release, September 2015 [↩]
- CME Group Volume Averaged 14.4 Million Contracts per Day in Third-Quarter 2015, Up 7 Percent from Third-Quarter 2014, CME Press Release, October 2015 [↩]
- Federal Reserve Leaves Rates Unchanged, No Hints at Liftoff Timing, Barrons Blog, July 2015 [↩]
- CME Group Announces the Launch of a Suite of European Natural Gas Contracts on CME Europe, Market Watch, December 2014 [↩]
- CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 [↩]