Non-U.S. Trading Activity, Effective Cost Management Will Be Key To CME’s Profits In 2019

CME Group (NASDAQ: CME) released its first quarter results earlier this week, with total revenues shrinking 5% sequentially to $1.18 billion due to an overall reduction in industry trading volumes. CME’s top line benefited from an improvement in non-trading revenues, though, which includes fees generated by the company for providing communication and post-trade services. Per Trefis estimates, CME Group’s shares have a fair value of $173, which is in line with the current market price. You can view our interactive dashboard on How Has CME Fared In Recent Quarters? to observe quarterly revenue trends and modify revenues and expenses to gauge the impact on the share price. Additionally, you can see more of our financial services data here.

A Quick Look at CME’s Revenue Sources

CME reported $4.3 billion in Total Revenues for full-year 2018. This included three revenue streams:

• Clearing and Transaction Fees: $3.6 billion in FY2018 (85% of Total Revenues). It comprises of CME’s electronic trading fees, private transaction surcharge, and other volume-related charges.
• Market Data and Information Services: $450 million in FY2018 (10% of Total Revenues). It comprises of data distribution revenues from subscribers.
• Other Revenues: $193 million in FY2018 (5% of Total Revenues). It includes income from access and communication fees, NEX’s risk management services and post-trade services.

Trading Activity Outside The U.S. Remained Strong In Q1

The average trading volume for CME in Q1 dropped 10% sequentially due to sharply lower trading activity in the U.S. markets. Average daily volumes (ADV) outside the U.S. remained strong, though, as trading activity in Asia and Latin America picked up as the quarter progressed. We expect the non-U.S. trading activity to continue to play a critical role in CME’s results over subsequent quarters.

• Interest-rate futures and options, which constitute nearly half of CME’s ADV, declined 14% year-on-year. For the last three years, interest-rate contracts have witnessed the strongest growth among all asset classes primarily due to the Fed’s rate hike process. We expect the ADV for these contracts to increase steadily over the rest of the year.
• Equity Indexes futures and options, which account for around 17% of total ADV, declined 23% year-on-year. While the ADV for these contracts has grown at 8% on average for the last three years, we expect growth at a moderate pace in the near term.
• Energy futures and options, which are responsible for around 12% of total ADV, declined 15% year-on-year. CME’s revenues from these contracts have grown in the high teens over recent quarter – resulting in these revenues making up 20% to the company’s trading revenues in 2018. Strong demand for WTI crude oil contracts should continue to fuel growth in these revenues going forward.

Management Retains Expense Management Targets

CME’s total operating expenses were $549 million for the quarter, which was 50% higher than the figure a year ago due to the acquisition of NEX last November. For the year, CME’s expects total expenses to be around $1.65 billion (excluding license fees) with a bulk of the targeted cost savings expected during the latter half of the year. If implemented successfully, the ongoing cost management exercise could boost the company’s operating margin by 3% per our estimates.

We expect CME to report an EPS of $6.21 for full-year 2019. Taken together with a estimated forward P/E multiple of 28, this works out to a $173 price estimate for the company’s stock as detailed in our interactive dashboard.

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