Key Takeaways From CME’s Q4

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After a decent performance through Q3 2017, CME Group (NASDAQ:CME) announced mixed Q4 results on Thursday, February 1.  The exchange’s trading volumes saw a dip in November and December, with its Q4 daily volumes coming in 2% below the year ago levels. Since transaction fees account for over 85% of CME’s revenue, a decline in quarterly volumes affected the company’s top line. The company’s net income included a $2.4 billion tax benefit due to recognition of a reduction in deferred tax liabilities as a result of the tax cut. Consequently, net income was $2.9 billion. Moreover, the company’s international investments are paying off, with over 50% growth in trading volumes during Asian and European trading hours.

We have a $120 price estimate for CME’s stock, which is below the current market price. We expect nearly 3% growth in the company’s overall revenue for the year 2018. We have created an interactive dashboard where you can change the company’s forecast revenue, margins, and other key drivers to gauge how they would impact its expected results and valuation.

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Despite the recent declines, the company remains bullish on its Market Data and Information Services segment, with new products in the pipeline with enhanced business intelligence and machine learning capabilities. The company has managed to gain traction by offering data services to its customers largely free of charge until recently, and we expect that many of its existing customers will be willing to pay for more advanced products.

The Fed’s rate hikes, and the expectation of further rate hikes, led to a strong rise in interest rate derivative volumes, and the tough year-on-year comp led to a 4% decline in Q4 2017. Energy derivatives maintained solid volumes, but the marginal decline from the year ago levels was likely due to the strong demand towards the end of 2016, with a surge in oil prices due to cuts in production. The continuous movements in gold and silver prices – due to the strengthening U.S. dollar and other economic and political factors in the U.S. – have continued to boost metals derivative volumes. Equities continued to decline, largely due to a more volatile and favorable trading period last year. After remaining subdued for most of the year so far, agricultural commodities volumes increased with the hurricanes striking coastal regions.

CME also recently launched bitcoin futures trading on its platform. With this initiative, the company is looking to get an early movers’ advantage in the volatile but fast-growing space. With strong global demand, bitcoin prices have risen more 15x since the beginning of 2017. Out of a total limit of 21 million bitcoins which can be mined, based on the existing protocol, the current bitcoins in circulation stands around 17 million. With the growth in supply slowing down, bitcoin trading provides a solid opportunity for exchanges. Over the long run, this could provide a healthy boost to CME’s trading volumes.

See the full Trefis analysis for CME Group.

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