Why The Rally In CME Group Stock Isn’t Over Yet

by Trefis Team
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After a 35% rally off the March bottom, CME Group’s stock (NASDAQ: CME) seems to have still some room to grow based on its valuation. CME Group’s stock has rallied from $135 to around $178 now, compared to the S&P, which moved over 40%. The stock is lagging the overall market as investors are cautious about the 25% drop in average daily volume (ADV) in May compared to the figure a year ago. Further, the company’s stock is still about 10% below the levels seen in late 2019.

The company has steady revenue and earnings growth over recent years, with its PE multiple increasing in a similar proportion. We believe the stock is likely to see some more upside after the recent rally and the potential weakness from a recession that is driven by the Covid outbreak. Our dashboard ‘What Factors Drove 83.2% Change In CME Group Stock Between 2016 And 2019?’ has the underlying numbers.

Some of this rise of the last three years is justified by the roughly 35% growth seen in CME Group’s revenue from 2016 to 2019, which translated into a 38% growth in Net Income figure.

CME Group’s PE multiple changed from around 24x in 2016 to 34x at the end of 2019. While the company’s PE has reduced to about 30x now, there is some upside when the current PE is compared to levels seen in the past years as the key metric has remained above the 32x mark in the last two years.

So what’s the likely trigger and timing for further upside?

CME Group is one of the largest financial derivatives exchanges, which derives 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. While the company’s result for Q1 2020 was on similar lines, we believe CME Group’s Q2 results will further confirm this reality with an increase in clearing and transaction fees and market data revenues. It is also likely to accompany a higher Q3 as-well-as 2020 guidance.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs. historic valuations become important in finding value. That said, market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

While CME Group’s stock presents some upside potential, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

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