CME Group’s stock (NYSE: CME) has gained 21% YTD, as compared to the 15% rise in the S&P500 over the same period. Further, at its current price of $203 per share, it is trading 6% below its fair value of $215 – Trefis’ estimate for CME Group’s valuation.
Interestingly, CME Group stock had a Sharpe Ratio of 0.4 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
The company surpassed the street estimates in the second quarter of 2023, with total revenues increasing by 10% y-o-y to $1.36 billion. It was primarily driven by a 9% growth in clearing & transaction fees, followed by an 8% rise in market data & information services revenues. Notably, the clearing & transaction fees benefited from a higher average rate per contract, partially offset by a marginal drop in the aggregate average daily volume (ADV). On the cost front, the operating margin improved from 60.6% to 61.7%. Further, the non-operating income increased 52% to $177.8 million. Overall, it resulted in a net income of $777.6 million – up 17% y-o-y.
The company’s top line grew 8% y-o-y to $2.8 billion in the first half of FY 2023, driven by a 7% improvement in clearing & transaction fees and an 8% rise in market data & information services revenues. The growth in clearing & transaction fees was because of higher aggregate ADV (up 2% y-o-y) and growth in average rate per contract. In addition, the non-operating income rose from $174.2 million to $421 million over the same period. It led to a 21% y-o-y increase in the net income to $1.66 billion.
Moving forward, we expect the same trend to continue in the subsequent quarters. Altogether, CME Group revenues are forecast to touch $5.44 billion in FY2023. Additionally, CME’s adjusted net income is likely to be around $3.24 billion in the year. This coupled with an annual EPS of $9.03 and a P/E multiple of just below 24x will lead to a valuation of $215.
|S&P 500 Return||-3%||15%||98%|
|Trefis Reinforced Value Portfolio||-6%||29%||563%|
 Month-to-date and year-to-date as of 8/29/2023
 Cumulative total returns since the end of 2016