CME Group Revised Price Estimate of $285

February 17th, 2012 by Trefis Team
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CME Group

We have updated our analysis of CME Group (NASDAQ:CME) and revised our price estimate for the company’s stock to $285, about 8% below our previous price estimate and about 4% below its current market price. The company recently reported its fourth quarter and full year 2011 results which were slightly below our expectations.

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CME’s revenues in 2011 increased by about 9.2%, with a corresponding increase in clearing and transaction fees and information services revenues despite a tough fourth quarter in which its average daily volume declined to 11.7 million from 12 million in Q4 2010. CME is the largest futures exchange in the U.S. and competes with Nasdaq OMX (NASDAQ:NDAQ), NYSE Euronext (NYSE:NYX) and Intercontinental Exchange (NYSE:ICE).

See our full analysis of CME Group here

Growth in interest rate products slowing

Trading in interest rate contracts account for about a fifth of the Trefis price estimate for CME Group’s stock. The average daily volume (ADV) of interest rate contracts was around 7 million in 2007 before the 2008-09 credit crisis, which resulted in reduced corporate debt issuance, reduced mortgage issuance and refinancing activity, and a slowdown in U.S. Treasury cash market trading.

As a result the ADV of interest rate contracts dropped to about 4.3 million in 2009. In 2010, CME witnessed a nearly 30% increase in ADV due to improved economic conditions and market participants’ need to hedge interest rate risks. In 2011, it again increased by almost 10% as the company introduced new products both at the short and long end of the interest rate curve. Going forward, although we expect the growth in ADV of interest rate contracts to continue during our forecast period, we believe the growth rate will cool down to the 5-10% range as competitors such as NYSE Euronext have launched interest rate derivative contracts to tap into the growing market. Also the Federal Reserve’s policy to keep interest rates near zero will further hurt growth in ADV. Our revised forecast for CME reflects this slowing growth.

Market data revenues under pressure from cost cutting

Various cost cutting initiatives at firms that use CME’s market data and information services have put additional pressure on the company to maintain a double digit growth rate in market data revenues. CME Group, however, has plans to combine its Dow Jones index services with S&P index services, which will help it strengthen its position in market data services.

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