Up 26% YTD, What’s Next For CME Group Stock?

CME Group’s stock (NASDAQ: CME) has gained 26% YTD, as compared to the 23% rise in the S&P500 over the same period. Further, at its current price of $211 per share, it is trading slightly below its fair value of $215 – Trefis’ estimate for CME Group’s valuation. 

Amid the current financial backdrop, CME stock has witnessed gains of 15% from levels of $180 in early January 2021 to around $210 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in CME stock has been far from consistent. Returns for the stock were 25% in 2021, -26% in 2022, and 26% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that CME underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CME face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company outperformed the consensus estimates in the third quarter of 2023, with total revenues increasing by 9% y-o-y to $1.34 billion. It was primarily driven by a 9% growth in clearing & transaction fees, followed by a similar rise in market data & information services revenues. The clearing and transaction fees primarily benefited from a higher average rate per contract, while the aggregate average daily volume (ADV) for the quarter was at par with the year-ago figure. On the cost front, operating margin improved from 60.2% to 61.3%. Further, the non-operating income increased 9% to $154.1 million. Overall, it resulted in a net income of $750.2 million – up 10% y-o-y.

The top-line grew 9% y-o-y to $4.14 billion in the first nine months of FY 2023, driven by an 8% growth in clearing & transaction fees and an 8% rise in market data & information services revenues. The improvement in clearing & transaction fees was partly due to higher aggregate ADV and partly because of a higher average rate per contract. In addition, the non-operating income rose by 83% y-o-y to $575 million over the same period. This led to a 17% y-o-y increase in the net income to $2.4 billion.

Moving forward, we expect the same trend to continue in Q4. Overall, CME Group revenues are estimated to touch $5.44 billion in FY2023. Additionally, CME’s adjusted net income margin is likely to improve in the year, leading to an annual GAAP EPS of $9.03. This coupled with a P/E multiple of just below 24x will lead to a valuation of $215.

[1] Month-to-date and year-to-date as of 12/20/2023
[2] Cumulative total returns since the end of 2016

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