CME Group (CME) Last Update 9/14/21
Related: NDAQ ICE
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
CME Group
$216.09
Yours
Trefis Price
N/A
$215
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


Trefis Report
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

CME Group Company

VALUATION HIGHLIGHTS

  1. Clearing & Transaction Fee constitutes 73% of the Trefis price estimate for CME Group's stock.
  2. Market Data constitutes 15% of the Trefis price estimate for CME Group's stock.
  3. Rental, Processing & Other constitutes 12% of the Trefis price estimate for CME Group's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q2 2021, CME Group reported Total Net Revenues of $1.18 billion, which is marginally less than the year-ago period. This could mainly be attributed to slight drop in clearing and transaction fees.

Impact of coronavirus outbreak

CME Group is one of the largest financial derivatives exchanges, which derives more than 80% of its revenues from clearing and transaction fees. Due to the ongoing coronavirus pandemic and economic uncertainty, securities markets are witnessing high trading activity. This, in turn, means that the exchanges would generate more revenue in terms of clearing and transaction fees. However, CME Group's total contract volume in 2020 has decreased due to lower average daily volume (ADV) in interest rate contracts coupled with a slight drop in revenue per contract. This has resulted in a marginal decline in the transaction and clearing fees on a year-on-year basis. While the company’s results for Q2, Q3, and Q4 2020 saw some decrease, CME Group’s full-year 2020 results were marginally better than the previous year.

Moreover, The company reported a decline in Q1 and Q2 2021 revenues on an year-on-year basis, and we expect the full year FY2021 revenues to remain around $4.9 billion.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below we look at key drivers which present significant upside or downside potential to our price estimate for CME Group.

  • Average Daily Volume of Interest rate Contracts The most significant driver of CME Group’s stock is the average daily trade volume of interest rate contracts. The expected rate hikes as a result of improvement in macro conditions should likely lead to higher hedging activity and, therefore, more volumes. The consistent rate hikes over the prior year and a half have resulted in enhanced volatility in the interest rate derivatives market. We saw the volumes rise from 5.90 million in 2013 to 10.35 million in 2019. We estimate that average daily trade volumes will increase to nearly 13.26 million by the end of our forecast period. However, in the absence of rate hikes, volumes could remain mostly flat. Should that occur, there would be a downside of about 5% to the Trefis price estimate.

  • Average Daily Volume of Energy Contracts Another big driver of CME Group’s stock is the average daily trade volume of energy contracts. As the economy eventually improves, we should see increased energy demand and movements in energy prices, which will likely lead to higher hedging activity and, therefore, more volumes. The consistent shift in oil prices over the prior year has resulted in increased volatility in the energy derivatives market. We saw the volumes rise from 1.27 million in 2015 to 2.37 million in 2019. We estimate that average daily trade volumes will increase to nearly 2.90 million by the end of our forecast period. However, if the intense market competition results in lost market share for the company, volumes could remain mostly flat. Should that occur, there would be a downside of about 2% to the Trefis price estimate.

BUSINESS SUMMARY

The CME Group was the first publicly traded exchange in the world. The company operates futures and derivatives exchanges including the Chicago Mercantile Exchange, the New York Mercantile Exchange (NYMEX) and the Chicago Board of Trade, as well as the Dow Jones Index Services. The company provides a marketplace, back-end financial infrastructure for administrating and setting up futures contracts and options on futures contracts.

Futures and options provide hedging opportunities for individuals and institutions to hedge themselves from the market risks and potentially profit from it. Historically, the company has focused on agricultural products for farmers in the U.S. but has diversified into interest rates, foreign exchange, energy, metals, and other commodities.

SOURCES OF VALUE

Clearing and Transaction Fees:

A significant part of CME Group’s revenues are derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions, and other volume-related charges for contracts executed through its trading venues. The fees are calculated on a per-contract basis, and the revenue generated from the fees fluctuates with the trading volume.

Other factors affecting revenues are rate structure, product mix, trading venue, and the percentage of trades executed by members vis-a-vis trades executed by non-members.

Market Data:

CME Group receives revenue from the dissemination of market data to subscribers. Its market data services are provided primarily through third-party distributors. Subscribers have access to real-time quotes, trading data, and summary market data for fees that are charged monthly on a per-screen basis.

KEY TRENDS

Eventual increase in interest rates

Supported by the interest rates hikes by the Fed in 2015, 2016, 2017, and 2018, there has been a rise in its derivative volumes. With the expectation of fewer rate hikes in the future, the interest rate contracts will continue to be in demand, albeit at a slower pace.

Volatility in energy prices has a positive impact on energy contract volumes

Volumes generally increase during periods of geopolitical or economic instability, as this often results in volatility in oil prices. Accordingly, investors look to hedge their exposure (or earn profits on speculation). As we expect continued volatility going forward, energy contract volumes should increase substantially.