CME Exits 2012 on a Weak Note

Zacks

CME Group Inc. (CME) reported fourth-quarter 2012 operating earnings per share of 63 cents. The result was in line with the Zacks Consensus Estimate but significantly lagged the year-ago quarter’s earnings of 71 cents.

Operating net income dipped 10.7% year over year to $210.3 million. This excluded tax benefit worth $43.5 million associated with revaluations in deferred income tax liabilities. Income tax adjustments, related to MF Global's bankruptcy, were also recorded in the year-ago quarter. Including these adjustments, the quarterly GAAP net income was $166.8 million or 50 cents per share as compared with $745.9 million or $2.25 per share in the year-ago period.

CME Group’s total revenue for the reported quarter declined 10.3% year over year to $660.9 million. It also fell short of the Zacks Consensus Estimate of $662 million. The significant drop was primarily due to a decline in clearing and transaction fees as a result of poor average daily volumes across interest rates, equities, foreign exchange, energy and metals asset classes. Even revenue from market data and information services witnessed deterioration. These were marginally offset by stable average rate per contract.

CME Group’s average daily volume plummeted 13% year over year to 10.2 million contracts in the reported quarter. However, total average rate per contract climbed 2% from the year-ago quarter to 83 cents. The volumes constituted mostly of lower-priced products across asset-class that require higher volume discounts.

CME Group’s clearing and transaction fees decreased 9.1% year over year to $544.6 million, while accounting for about 84% of the total revenue. Additionally, revenue from market data and information services decelerated 25.0% year over year to $79.3 million. However, revenue earned from access and communication fee surged 61.8% year over year to $23.3 million, while other revenue plunged 20.3% year over year to $13.7 million.

However, total operating expenses declined 17.6% year over year to $285.3 million. Excluding an expense of $27 million related to MF Global's bankruptcy in the year-ago quarter, operating expenses declined 10% year over year. Operating income fell 3.8% year over year to $375.6 million, although operating margin improved to 56.8 % from 53.0% in the year-ago quarter.

Meanwhile, CME Group recorded a non-operating expense of $22.1 million against $20.7 million in the year-ago quarter, primarily owing to higher interest and borrowing costs.

Highlights of Full-Year 2012

For full-year 2012, CME Group reported operating earnings of $3.02 per share, which missed the Zacks Consensus Estimate of $3.03 marginally but significantly lagged $3.41 per share in 2011.Reported net income stood at $896.3 million or $2.70 per share in 2012 against $1.81 billion or $5.43 per share recorded in 2011.

Total revenue plummeted 11.2% year over year to $2.91 billion in 2012, which lagged the Zacks Consensus Estimate of $2.92 billion as well. Total operating expenses dipped 2.9% year over year to $1.22 billion, well within management’s target of below 5% growth.

Financial Update

As of Dec 31, 2012, CME Group had $1.66 billion of cash and marketable securities, higher than $1.09 billion at 2011-end, while long-term debt stood at $2.106 billion, in line with the 2011-end level.

As of Dec 31, 2012, CME Group had total assets of $38.86 billion (down from $40.76 billion as of Dec 31, 2011), while total shareholders’ equity stood at $21.42 billion (down from $21.55 billion as of Dec 31, 2011). The company did not repurchase shares during the reported quarter.

Guidance

Management projects expense to grow to about $1.25 billion in 2013, primarily due to an increase in hiring for new technology and regulatory requirements as well as for the initiation of public relations campaigns for retaining market confidence. This indicates that the company still aims to maintain expense growth of below 5%, as anticipated earlier.

Dividend Update

On Jan 30, 2013, the board of CME Group declared a regular first-quarter dividend of 45 cents per share, which will be paid on Mar 25, 2013 to shareholders of record Mar 8, 2013.

On Dec 28, 2012, CME Group paid a semi-variable dividend of $1.30 per share to shareholders of record Dec 17, 2012.

On Dec 26, 2012, the company paid a regular fourth-quarter dividend of 45 cents per share, to shareholders of record as on Dec 10, 2012. The dividend reflects the effect of 5-for-1 stock split of its common stock, effective since Jul 20, 2012.

Overall, CME Group paid $1.2 billion in dividends in 2012, of which $581 million was paid in the reported quarter.

Others

CME Group carries a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Euronet Worlwide Inc. (EEFT), RLI Corp. (RLI) and Moody’s Corp. (MCO), all of which carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CME

Read the Full Research Report on RLI

Read the Full Research Report on MCO

Read the Full Research Report on EEFT

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