Why Isn’t CME Group Stock Performance Reflecting Its Record Revenues, Improving Margins?

CME Group’s stock (NASDAQ: CME) has largely traded sideways since the beginning of the year and has not seen much change as compared to the 17% rise in the S&P 500 over the same period. In sharp contrast, CME Group’s peer Intercontinental Exchange (NYSE: ICE) is up 25% YTD. We believe that at its current price of $207 per share, it is trading 6% below its fair value of $219 – Trefis’ estimate for CME Group’s valuation.

Amid the current financial backdrop, CME stock has shown strong gains of 30% from levels of $160 in early January 2021 to around $205 now, vs. an increase of about 50% 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 29% in 2021, -23% in 2022, and 31% 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 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 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company surpassed consensus estimates in the second quarter of FY 2024, with total revenues increasing by 13% y-o-y to a record high of $1.53 billion. It was primarily driven by a 12% rise in the clearing & transaction fees, followed by a 7% gain in market data & information services and a 37% growth in the other revenues. Notably, clearing & transaction fees contribute more than 80% of the top line. It benefited from a 14% jump in the quarterly average daily volume (ADV). On the cost front, operating margin improved from 61.7% to 65.3%. However, the non-operating income decreased from $178 million to $154 million. Overall, it resulted in a 14% improvement in the net income to $883.2 million.

The top line grew 8% y-o-y to $3.02 billion in the first half of FY 2024. It was primarily driven by a 6% rise in the clearing & transaction fees, which gained because of a 5% increase in the aggregate average daily volume. In terms of costs, total expenses as a % of revenues decreased in the year, leading to an operating margin of 64.9% vs. 62.5%. However, the positive impact was somewhat offset by a 27% drop in the total non-operating income to $308 million. Altogether, it resulted in a net income of $1.74 billion – up 5% y-o-y.

Moving forward, we expect the same momentum to continue in Q3. Overall, CME Group revenues are forecasted to touch $5.97 billion in FY2024. Additionally, CME’s adjusted net income margin is likely to improve in the year, leading to an annual GAAP EPS of $9.75. This coupled with a P/E multiple of just above 22x will lead to a valuation of $219.

[1] Returns as of 8/26/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates