Up 25% Since The Beginning of 2023, Where Is CME Group Stock Headed?

CME Group’s stock (NYSE: CME) has made negligible gains YTD, as compared to the 7% rise in the S&P500 over the same period. Further, at its current price of $210 per share, it is trading 6% below its fair value of $224 – 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 35% 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 25% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 JPM, V, 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 surpassed the street estimates in the first quarter of 2024, with total revenues increasing by 3% y-o-y to $1.49 billion. It was primarily driven by a slight growth in clearing & transaction fees, followed by a 6% rise in market data & information services, and a 37% gain in the other revenues. Notably, the average rate per contract increased from $0.664 to $0.695 in Q1, but it was almost offset by a 2% drop in the quarterly average daily volume (ADV). On the cost front, operating margin improved from 63.4% to 64.5%. However, the non-operating income decreased from $243.2 million to $153.8 million. Overall, it resulted in an adjusted net income of $844.4 million – down 3% y-o-y.

The top-line grew 11% y-o-y to $5.6 billion in FY 2023. It was driven by an 11% increase in the clearing & transaction fees, a 9% rise in market data & information services, and a 23% jump in other 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 terms of costs, total expenses as a % of revenues decreased in the year. Further, total non-operating income increased 51% y-o-y to $718 million. Altogether, it resulted in a net income of $3.23 billion – up 20% y-o-y.  

Moving forward, we expect the same trend to continue in Q2. Overall, CME Group revenues are forecast to touch $5.86 billion in FY2024. Additionally, CME’s adjusted net income margin is likely to see some improvement in the year, leading to an annual GAAP EPS of $9.60. This coupled with a P/E multiple of just above 23x will lead to a valuation of $224.

[1] Returns as of 4/30/2024
[2] Cumulative total returns since the end of 2016

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