Down 15% YTD, CME Group Stock Can Recover In The Near Term

by Trefis Team
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After a meager rise of 21% since the March bottom, at the current price near $169 per share, we believe CME Group stock (NASDAQ: CME) has more to go based on its historic P/E multiples. CME stock has increased from $140 to $169 off the recent bottom compared to the S&P 500 which increased almost 60%. The stock has underperformed the broader market and is down 16% YTD. This is because investors are concerned about the decline in its Q2 and Q3 revenues – the top-line has dropped 11% to a consolidated figure of $2.26 billion for the last 2 quarters, as compared to the figure of $2.55 billion a year ago. On a similar note, earnings have declined by 20% to a consolidated figure of $2.56 from $3.22 a year ago.

The company has seen some growth in revenue over 2018-2019, while its P/E multiple has not seen a significant increase. We believe the stock is likely to see some upside in the near term despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Sell CME Group Stock? provides the key numbers behind our thinking.

CME Group’s revenue increased 13% from $4.3 billion in 2018 to $4.9 billion in 2019, which translated into an 8% growth in net income over the same period. The slightly lower growth in net income was due to higher operating expenses driven by compensation cost and technology support services, reducing the net income margin from 45.5% to 43.5%.

During the same period, the P/E multiple increased from around 33x to just below 34x. The P/E multiple dropped in 2020 as the company has reported lower earnings and revenues over the last two quarters. While CME Group’s P/E is just above 28x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of 34x end of 2019 and 33x at the end of 2018.

Where Is The Stock Headed?

CME Group is one of the largest financial derivatives exchanges, which derives more than 80% of its revenues from clearing and transaction fees. While the company’s revenues have seen some decrease in Q2 and Q3 on a year-on-year basis, it has benefited from significantly higher equity indexes trading volumes in the recent quarters – more than offset by lower volumes in energy and interest rates contracts. However, we expect the trading volumes to normalize in the coming months. This, coupled with its strong fundamentals, is likely to enable CME Group to deliver slightly higher revenues for the full year 2020 than the previous year, positively impacting the stock price.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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 become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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