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

+1.41%
Upside
216
Market
219
Trefis
CME: CME logo
CME
CME

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.

Relevant Articles
  1. Up 25% Since The Beginning of 2023, Where Is CME Group Stock Headed?
  2. Up 26% YTD, What’s Next For CME Group Stock?
  3. What To Expect From CME Group Stock?
  4. What To Expect From CME Group Stock?
  5. CME Group Stock To Top The Street Expectations In Q4
  6. What To Expect From CME Group Stock?

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.

 Returns Aug 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 CME Return 7% -1% 134%
 S&P 500 Return 1% 17% 149%
 Trefis Reinforced Value Portfolio 5% 13% 737%

[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