CME Group, Inc.
/(CME – NYSE)
/$3 $159.45
Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q18 Earnings Results
Previous Edition: News Update; Mar 6, 2018
Flash Update
OnApr 26, 2018,CME Group Inc. reported first-quarter 2018 adjusted earnings per share of $1.86, beating the Zacks Consensus Estimate of $1.85 by 0.5%. Moreover, the bottom line soared 52.5% year over year.
The year-over-year improvement was mainly owing to higher trading volumes as well as revenues. Also, options business remained sturdy in the quarter.Notably, the company achieved a record high of average quarterly daily volume in five of its six product lines along with a record high in total options and electronic options.
Net income came in at $1.76 per share, which surged 49.2% year over year. The company’s focus on expense efficiency contributed to this upside.
Performance in Detail
CME Group’s revenues of $1.11 billion improved 19.3% year over year. However, the top line missed the Zacks Consensus Estimate of $1.12 billion by 1.2%. Increase in revenues can be attributable to higher clearing and transaction fees (up 22.9% year over year) as well as access and communication fees (up nearly 7% from the year-ago quarter). Also, broad-based strength across all of the company’s asset classes aided this improvement.
Total expenses increased 12.1% year over year to $368.1 million during the reported quarter, attributable to higher compensation and benefits, technology support services, professional fees and outside services, licensing and other fee agreements and other.
Operating income improved 23.3% to $740.9 million from the prior-year quarter.
Average daily volume (ADV) increased nearly 30% year over year to an all-time high of 22.2 million contracts, backed by higher volumes across all the six product lines. Average rate per contract rose in only two of the six product lines.
Financial Update
As of Mar 31, 2018, CME Group had $875 million of cash and marketable securities, which plunged 56.1% from the tally at 2017 end. As of Mar 31, 2018, long-term debt of $2.2 billion remained flat with the level at year-end 2017.
As of Mar 31, 2018, the company had total assets worth $69.9 billion, down 7.7% from $75.8 billion at year-end 2017.
Dividend Update
During the first quarter, the company paid dividends worth $1.4 billion comprising the annual variable dividend of $1.2 billion and the regular first-quarter dividend of $238 million.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON CME
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
CME Group (CME), which operates as an exchange for trading futures and options on futures, is the largest and most diverse financial exchange company in the world. The company offers futures and options on futures in the following areas: interest rates, equity indexes, foreign exchange, and commodities.
Of the brokerage firms in the Digest group, nearly 67% were positive on the stock, 33% held a neutral stance while no firm gave negative outlook on the same. A total of eight out of nine firms covering the stock provided target prices ranging from $147.00 (7.5% downside from the current price) to $187.00 (17.7% upside from the current price).
Bullish (Positive or equivalent outlook)– 6/9 firms or 66.7% – Firms note that CME Group’s international growth, which has been slowing down over the past few quarters, has been back on track since the last quarter. European customer accepting CME’s WTI crude contract has been a major catalyst.
Cautious (Neutral or equivalent outlook) – 3/9 firms or 33.3% – Firms with a cautious outlook notes that the company is facing volatility in equity index franchise. Nonetheless, the company remains well-poised on the back of ramped-up international growth, solid open interest and a sustained cost control. Firms believe, the company’s risk-reward is balanced at the current level, given the expected fifth variable dividend that CME Group announces, volatility concerning unwinding of the Fed’s balance sheet and the expected data growth in 2018.
The company thus estimates about only 1% improvement in top line and 5% in the bottom line for 2017.
Bearish (Negative or equivalent outlook) – 0/10 firms or 0.0%
Mar 28, 2018
Overview [Note: Only highlighted material has been changed.]
Based in Chicago, IL, CME Group operates as a futures exchange for the trading of futures and options on futures. CME Group is the largest and most diverse financial exchange in the world. The company offers futures and options on futures in product areas like interest rates, stock indexes, foreign exchange, agricultural commodities, energy and alternative investment products such as weather, real estate and economic derivatives. CME Group operates as a hybrid market and offers majority of its products through proprietary trading, Globex and/or a physical trading floor. Its products include CME Eurodollar contracts and contracts based on the U.S. stock indices.
The company also provides clearing operations to other exchanges. It continues to innovate and develop new products and services with new initiatives targeting increased electronic trading of interest rate options (a user-defined spread system), spot market foreign exchange (FXMarketspace), credit default swaps (credit event futures) and increased functionality (Swapstream). For more information about the company, please visit its website at
Firms identified the following key issues for evaluating the investment merits of CME:
Key Positive Arguments / Key Negative Arguments- Initiatives like Swapstream and FXMarketSpace support ADV (average daily volume) growth going forward.
- The company aims to increase revenues with a diversified product portfolio. For this, the company is also trying to curtail expenses, which are part of its current outlook.
- OTC swap market is still a big opportunity as CME targets fixed income market.
- The company is investing more in organic expansion. The new derivative market in Europe should boost the top line.
- Payment of dividend to boost investors’ confidence.
- CME Group’s results tend to be volatile, given its correlation to interest rate changes.
- The fluctuation trend in volumes’ growth poses ample operational and financial risks.
- The company is susceptible to changes in domestic and international markets, besides economic conditions.
- Competition is intensifying in the global marketplace.
- Higher capital expenditure limits share buybacks.
CME Group’s fiscal year coincides with the calendar year.
Mar 28, 2018
Long-Term Growth [Note: Only highlighted material has been changed.]
The firms have a positive view on CME Group’s long-term earnings growth potential from the expected robust improvement in derivatives volumes, which they believe will continue to be driven by globalization combined with development of new markets, increased sophistication of market participants, product innovation and increased demand for risk management.
Most bullish firms believe that the long-term prospects of CME Group are attractive, including rising volumes (particularly in the interest rate complex), expanding margins, the OTC clearing and trading opportunities as well as the company’s healthy cash flow.
CME Group continues to look at new markets and products to provide diversity and new potential areas of growth. Instead of pursuing foreign acquisitions in order to increase its global footprint, the company has focused on international partnerships with providers worldwide.
Mar 28, 2018
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Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 66.7%↓
Neutral / 33.3%↑
Negative / 0.0%
Avg. Target Price / $172.63↑
Digest High / $147.00↑
Digest Low / $187.00↑
Analysts with Target Price/Total / 8/9
Risks to the target price include low interest rates, regulatory changes to market structure and counterparty credit risk.
Recent Events [Note: Only highlighted material has been changed.]
On Mar 29, 2018, CME Group has agreed to acquire NEX Group plc for £10 per share in a cash-stock deal. The transaction is expected to culminate in the second half of 2019, subject to closing conditions.
Each shareholder of NEX Group will receive 500 pence incash and 0.0444 common shares of CME Group.
CME Group will leverage NEX Group’s leading electronic FX and fixed income cash execution platforms to improve trading technology and streamline access. The acquisition expands CME Group's forex business besides widening geographical presence. CME Group can have trading opportunities across spot and futures FX products as well as cash, repo and futures products in U.S. Treasuries.
On Feb 1, 2018, CME Group Inc. reported fourth-quarter 2017 adjusted earnings per share of $1.12, beating the Zacks Consensus Estimate of $1.10. The bottom line, however, deteriorated 1.8% year over year.
CME Group’s revenues of $900 million decreased 1.4% year over year. However, the top line beat the Zacks Consensus Estimate of $884 million by 1.8%.
Full-Year Highlights
For 2017, CME Group reported adjusted earnings per share of $4.77, beating the Zacks Consensus Estimate by 0.4% and improving 5.3% year over year.
Total revenues of $3.6 billion grew 1.4% year over year.
Revenues [Note: Only highlighted material has been changed.]
CME Group’s revenues of $900 million dipped 1.4% year over year in 4Q17. However, the top line surpassed the Zacks Consensus Estimate of $884 million by 1.8%. Decline in revenues can be attributable to lower clearing and transaction fees (down 1.3% year over year) and “other” (down nearly 33.5%).
Total revenues of $3.6 billion in 2017 inched up 1.4% year over year.
Total revenues, as compiled by Zacks Digest, are shown in the table below:
Revenues ($ million) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EDigest High / $913 / $891 / $900 / $968 / $3,595 / $3,645 / $3,946↑ / $4,221 ↑
Digest Low / $913 / $891 / $900 / $967 / $3,595 / $3,645 / $3,880↓ / $4,077↓
Digest Avg. / $913 / $891 / $900 / $968 / $3,595 / $3,645 / $3,913 ↓ / $4,149 ↓
Y-o-Y Growth / 12.2% / 5.8% / -1.4% / 4.1% / 8.1% / 1.4% / 7.4% / 6.0%
Sequential Growth / 8.5% / -3.7% / 1.0% / 7.5%
Average daily volume (ADV) declined 2.5% year over year to 15.9 million contracts due to lower volumes across three of the six product lines. Average rate per contract increased in only two of the six product lines.
CME Group’s clearing and transaction fees slid 1.3% year over year to $758 million. Additionally, revenues from market data and information services were $102 million, having declined 1.9% year over year. Revenues from access and communication fees ascended 9% to $29 million while other revenues slumped nearly 33.4% to $14 million.
Guidance
Management estimates organic market data revenue growth of 5-6% on a y-o-y basis over the next few years.
Total revenue components compiled by Zacks Digest are shown in the table below:
Revenue Components($ million) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019E
Clearing
and Transaction Fees / $769 / $756 / $758 / $827 / $3,036 / $3,099 / $3,310↓ / $3,507↓
Market Data and Information Services / $100 / $97 / $102 / $102 / $407 / $392 / $443↑ / $477↓
Access Fees and Communication Fees / $24 / $26 / $26 / $26 / $91 / $101 / $106 / $109
Other / $21 / $12 / $14 / $14 / $61 / $54 / $55 ↑ / $55 ↑
Total Revenue / $913 / $891 / $900 / $968 / $3,595 / $3,645 / $3,913 ↓ / $4,149 ↓
Outlook
One firm with a neutral outlook estimates data & information services revenues in 2018 to improve 15% y/y, primarily driven by 24% data terminal pricing increase to be implemented in April. The Zacks Digest model projects Market Data and Information Services revenues to increase 12.9% y/y to $443 million in 2018.
Nonetheless, attributable to uncertainty revolving around potential client cancellation rates and the uptake of CME’s new derived data products, management refrained from giving any guidance.
Please refer to the Zacks Research Digest spreadsheet on CME for more details
Margins[Note: Only highlighted material has been changed.]
Total expenses declined 2.7% year over year to $362.7 million during the reported quarter, attributable to lower compensation and benefits, communications, professional fees and outside services, amortization of purchased intangibles as well as depreciation and amortization.
Operating income dipped 0.5% to $537.3 million from the prior-year quarter.
Margins, as compiled by Zacks Digest, are shown in the table below:
Margins / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EOperating Margin / 64.6% / 66.4% / 63.9% / 67.9% / 66.1% / 66.5% / 67.7%↓ / 68.9%↓
Pre-tax Margin / 65.8% / 70.3% / 67.8% / 72.5% / 67.0% / 69.7% / 73.1%↑ / 76.1%↓
Net Margin / 42.4% / 45.5% / 42.6% / 54.7% / 42.7% / 44.5% / 55.2%↑ / 57.5%↑
Guidance
Management projects its adjusted total operating expenses guidance excluding licensing fees to range between $1.10 billion and $1.11 billion in 2018.
Per the Zacks Digest model, total expenses are expected to increase 3.6% to $1.3 billion in 2018, 2% to $1.3 billion in 2019 and 3.9% to $1.3 billion in 2020.
CME Group announced plans to shut down London-based derivatives exchange and clearing house, CME Europe and CME Clearing Europe, by this year-end. This business move was driven by customers’ preference to trade more via CME Group’s U.S. platform. Shutting down operations will result in annual savings between $10 million and $12 million to primarily impact 2018. The same will also free up over $150 million in capital. Nonetheless, CME Group will continue to have considerable operations in London as the region is an important part of the company’s global growth strategy.
Given the new tax regulation, already effective beginning 2018, the company expects effective tax rate to be about 24.5% in 2018.
Please refer to the Zacks Research Digest spreadsheet on CME for more details
Earnings per Share [Note: Only highlighted material has been changed.]
CME Group’s 4Q17 adjusted earnings per share of $1.12, outpaced the Zacks Consensus Estimate of $1.10. The bottom line, however, deteriorated 1.8% year over year.
The year-over-year decline was mainly due to lower trading volumes as well as revenues. Nonetheless, options business remained sturdy in the quarter.
Including a tax benefit owing to recognition of a reduction in deferred tax liabilities as a result of the Tax Cuts and Jobs Act of 2017, net income was $8.63 per share, which skyrocketed 684.5% year over year.
For 2017, CME Group reported adjusted earnings per share of $4.77, beating the Zacks Consensus Estimate by 0.4% and improving 5.3% year over year.
EPS, as compiled by Zacks Digest, is shown in the table below:
EPS (in $) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EDigest High / $1.14 / $1.19 / $1.12 / $1.55 / $4.53 / $4.77 / $6.32 ↑ / $6.95↑
Digest Low / $1.14 / $1.19 / $1.12 / $1.54 / $4.53 / $4.77 / $6.20↑ / $6.65↑
Digest Avg. / $1.14 / $1.19 / $1.12 / $1.55 / $4.53 / $4.77 / $6.26↑ / $6.80↑
Digest y-o-y growth / 20.6% / 13.4% / -1.5% / 26.5% / 14.0% / 5.3% / 31.2% / 8.6%
Sequential Growth / 8.5% / -3.2% / -5.7% / 37.5%
Highlights from the EPS chart are as follows:
- 2018 forecasts (2 firms) range from $6.20 to $6.32 with an average of $6.26.
- 2019 forecast (2 firms) range from $6.65 to $6.95 with an average of $6.80.
Outlook
Per the Zacks Digest model, shares outstanding are expected to inch up 0.2% year over year to 341 million by the end of FY18, 0.6% year over year to 342 million by FY19-end and again 0.6% year over year to 345 million by the end of FY20. This represents a two-year CAGR of 0.6% on shares outstanding in 2018.
Per the Zacks Digest model, EPS for 2019 will witness a three-year CAGR of 19.4%, driven by a 21.2% improvement in net income, further partially offset by 0.4% shares outstanding.
Please refer to the Zacks Research Digest spreadsheet on CME for more details.
Research Analyst / Tanuka DeCopy Editor / Pramita Bose
Content Ed.
Lead Analyst / Tanuka De
QCA / Tanuka De
No. of brokers reported/Total brokers / 8/9
Reason for Update / 1Q18Flash Update
Zacks Investment Research Page 1