Key Takeaways From CME’s Q3
CME Group (NASDAQ:CME) recently reported a mixed third quarter, slightly beating consensus earnings estimates, while missing revenue expectations. In Q3, its adjusted earnings grew by 22% year-on-year (y-o-y) to $1.45, while revenue grew by over 1% y-o-y to $904 million. The modest top line growth was largely due to lower than expected Q3 trading volumes in FX, Agricultural Commodities, and Energy product lines, partially offset by strong growth in Market Data revenue. Nevertheless, CME has witnessed an impressive start to Q4, with robust growth across product lines and total volumes growing by over 40% y-o-y in October. Market Data revenue saw robust growth despite the price increase earlier this year, and holds significant long term potential. Moreover, CME, much like its competitors, is trying to increase its focus on non-trading lines of business in an attempt to negate market fluctuations. We expect that the multiple interest rate hikes, impressive trading volumes across product lines, strong growth in its bitcoin futures trading volume, and its expansion of futures products in emerging markets should drive its Q4 results. Further, CME’s proposed acquisition of NEX Group should expand its offerings and increase its presence in the European and Asian markets. As a result, the deal provides decent medium term growth. Nevertheless, we expect CME to report higher expenses due to its various strategic investments, which should slightly dampen its bottom line in the near term.
We have updated our model and maintained our $165 price estimate for CME’s stock, which is below the current market price. 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.
CME’s Market Data and Information Services segment, which contributes to about 10% of overall revenues, was the fastest growing (up 14% y-o-y) segment in Q3. The strong growth in the segment was mainly due to increased demand for its products despite the price hike on April 1. As a result, CME remains upbeat on its Market Data and Information Services segment, with new products in the pipeline with enhanced business intelligence and machine learning capabilities. Consequently, this should help boost its top line going forward – driven by the continued adoption of its products.
The company generates about 85% of its revenue from Clearing and Transaction fees, and the segment fell marginally year on year. The decline was largely due to weak trading activity across three of the six product lines – Q3 trading volumes coming in at 15.58 million (down 1% year-on-year). However, healthy growth across all product areas coupled with strong growth in trading volumes should drive its Q4. Further, the uncertainty around macro conditions and Fed’s indication of further interest rate hikes should propel this segment in the near term, leading to sustained growth in volumes. Additionally, the recent surge in oil prices and OPEC’s recent stance on capping production should lead to market volatility in the near term, as the outlook for the restricted production of oil remains uncertain. This should drive growth in trading volumes. Moreover, the continuous movements in gold and silver prices should further boost metals derivative volumes. We expect further volume growth with further improvement in the U.S. economy.
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