Earnings Beat In The Cards For The CME Group Stock In Q3?

CME Group (NASDAQ: CME) is scheduled to report its fiscal Q3 2021 results on Wednesday, October 27. We expect CME Group to beat the earnings and revenue consensus estimates. The world’s largest financial derivatives exchange surpassed street expectations in the last quarter, with revenues marginally decreasing to $1.18 billion. It was because of a slight drop in clearing and transaction fees, partially offset by an 8% y-o-y growth in market data and information services. The clearing and transaction fees suffered due to lower equity indexes and metals average daily volume (ADV), coupled with some decline in the average rate per contract. Further, the profitability numbers were around the same level as the year-ago period. We expect the same trend to continue in the third quarter.

Our forecast indicates that CME Group’s valuation is $216 per share, which is just below the current market price of $217. Our interactive dashboard analysis on CME Group’s Earnings Preview has more details. 

(1) Revenues expected to beat the consensus estimates

CME Group’s revenues for full-year 2020 were $4.9 billion – just above the year-ago period. While the non-trading revenues grew 7% y-o-y to $986 million in the year, the growth was offset by a slight drop in the clearing & transaction fees.

• CME generates close to 80% of the total revenues from clearing & transaction fees. The clearing & transaction fee is directly dependent on the average trading volumes (ADV). Hence, market volatility benefits the exchange’s top-line. The securities markets experienced high market volatility in 2020 due to the impact of the Covid-19 crisis. However, unlike its peers, CME was not able to capitalize on it. It suffered due to lower ADV in interest rate contracts and a decline in average rate per contract. The same continued in the first quarter of 2021, with total ADV declining by 19% y-o-y. That said, the volumes improved in the second quarter. Further, the average daily volumes have increased 14% y-o-y in the third quarter, as per the monthly volume report of September. We expect the segment to see some growth in the third quarter.
• The revenue share of non-trading income has increased from 15% in 2018 to 20% in 2020. It posted a 7% y-o-y growth in 2020, mainly driven by a 5% increase in market data & information services, followed by a 9% jump in access & communication fees. Further, the segment has continued its growth trajectory in the first two quarters of 2021, and we expect it to do the same in the third quarter. 
• Overall, we expect CME Group’s revenues to touch $4.9 billion for FY2021.

Trefis estimates CME Group’s fiscal Q3 2021 revenues to be around $1.24 billion, 8% above the $1.15 billion consensus estimate. We expect the third-quarter results to see growth in all the revenue segments.

Moving forward, we expect the non-trading volumes to drive growth in FY2021, while the clearing & transaction fee is likely to remain below the year-ago level. Our dashboard on CME Group’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.

2) EPS is likely to top the consensus estimates

CME Group Q3 2021 adjusted earnings per share (EPS) is expected to be $1.60 per Trefis analysis, almost 3% above the consensus estimate of $1.56. The exchange’s adjusted net income of $2.1 billion in 2020 was around the same level as the 2019 figure. However, the net income for the first six months of 2021 has decreased 15% y-o-y to $1.1 billion, mainly due to lower revenues and higher effective tax rate as compared to the year-ago period. We expect the same pattern to continue in the third quarter.

Going forward, we expect CME Group’s net income margin to see some improvement in FY2021, leading to an adjusted net income of $2.4 billion – up 14% y-o-y. It will likely result in an EPS of $6.61.  

(3) Stock price estimate 1% lower than the current market price

We arrive at CME Group’s valuation, using an EPS estimate of around $6.61 and a P/E multiple of close to 33x in fiscal 2021. This translates into a price of $216, which is marginally below the current market price of around $217. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

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