CME Group Stock Has 15% Upside

We believe that CME Group’s stock (NASDAQ: CME) has a 15% upside to its pre-crisis peak in the near term. CME trades at $182 currently and it has gained 9% in value so far this year. It traded at a pre-Covid high of $208 in February and is 12% above that level now. Also, CME stock has gained 30% from the low of $140 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 65% since March lows), as 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.

CME Group, one of the largest financial derivatives exchanges in the U.S, outperformed the consensus estimates in its recently released Q3 results. It reported net revenues of $1.08 billion – 12% less than the year-ago period, mainly due to a 20% drop in clearing and transaction fees. The exchange has suffered due to lower volumes in energy and interest rates contracts over the recent quarters, partially offset by a jump in equity indexes trading volumes. As the economy moves towards normalcy, we expect the trading volumes to normalize in the coming months, benefiting the exchange’s stock price. In view of the 30% growth in CME Group stock since late March, we believe that the stock has some room for growth in the near future. Our conclusion is based on our detailed analysis of CME Group’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 65% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how CME and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

CME Group vs S&P 500 Performance Over 2007-08 Financial Crisis

CME Group stock declined from levels of around $122 in October 2007 (the pre-crisis peak) to roughly $36 in March 2009 (as the markets bottomed out), implying that the stock lost around 70% 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 $67 in early 2010 – rising by 84% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

CME Group’s Fundamentals in Recent Years Look Strong

CME Group revenues grew by 48% from $3.3 billion in 2015 to $4.9 billion in 2019, primarily led by growth in clearing & transaction fees – it contributes around 80% of the company’s revenues. Similarly, the company’s adjusted net income improved from $1.2 billion to $2.1 billion over the same period, resulting in an improvement in the company’s net income margin from 37% to 43%. The company’s Q3 2020 revenues were 12% below the year-ago period and its EPS figure decreased from $1.78 to $1.21.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to $208 (15% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $208 level CME stock was at before the coronavirus outbreak gained global momentum.

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