Could CME Stock Retain Most Of Its Value Amid Coronavirus Crisis?

by Trefis Team
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Comparing the trend in CME Group’s (NASDAQ: CME) stock over recent months with its trajectory during and after the Great Recession of 2008, we believe that the stock can recover back to the $210 level, similar to the trends seen in the last crisis, once fears surrounding the coronavirus outbreak are put to rest. This represents an upside potential of around 15% for the stock. Our conclusion is based on our detailed comparison of CME Group’s performance against the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did CME Group Stock Fare Compared With S&P 500?

The World Health organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread, which was followed by significant negative movement in the stock market. However,  the broader markets somewhat improved on 19th February after the signs of effective containment of coronavirus spread in China and hopes of monetary easing by major central banks helped the index. Between Feb 20th and April 13th, CME’s stock has lost 12% of its value (vs. about a 19% decline in the S&P 500). A bulk of the decline in the S&P Index came after March 8th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown, followed by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. CME’s stock declined by 15% over the same period which was more than the drop since Feb 20th.

CME Group’s Stock Has Fallen Considerably Because The Situation On The Ground Has Changed

CME Group is one of the largest financial derivatives exchanges, which drives more than 80% of its revenues from clearing and transaction fees. Due to ongoing coronavirus pandemic and economic uncertainty, securities markets are witnessing high trading activity. This, in turn, means that the exchange would generate more revenue in terms of clearing and transaction fees. The slight drop in the company’s stock price is due to the negative market sentiment and fears of the economic slowdown.

We believe CME Group’s Q1 and Q2 results will confirm this reality with an increase in clearing and transaction fees and market data revenues. If signs of coronavirus containment aren’t clear by the April Q1 earnings timeframe, it is likely CME Group’s stock, along with the broader market, is going to see a continued drop when results confirm palpable reality.

But CME Group Stock Witnessed Something Similar During The 2008 Downturn

We see CME stock declined from levels of around $81 in October 2007 (the pre-crisis peak) to roughly $25 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 69% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, CME recovered strongly post the 2008 crisis to about $47 in early 2010 – rising by 88% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will CME Group’s Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that CME stock has fallen by 12% this time around compared to the 69% decline during the 2008 recession, a likely outcome might be for it to recover by 15% to levels of $210 once economic conditions begin to show signs of improving. This marks a complete recovery back to the $207 level CME stock was at before the coronavirus outbreak gained global momentum. This expected recovery for the stock could be attributed to its unique business model, which would benefit from the increased trading activity in the market.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture, and complements our analyses of the coronavirus outbreak’s impact on a diverse set of financial services companies including State Street and Morgan Stanley. The complete set of coronavirus impact and timing analyses is available here.

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