CME Group's Expense Control, Secure Capital to Drive Growth - Analyst Blog
On Dec 18, we issued an updated research report on CME Group Inc. (CME). The company is likely to benefit from the tightened expense guidance, while the pending deal with GFI Group Inc. (GFIG) is expected to shore up operating leverage. However, stiff competition, regulatory compliance, interest rate volatility and pricing pressure draw several operational and financial risks.
Furthermore, CME Group’s capital position remains secure, reflected in the latest variable dividend payout worth $673 million along with four regular quarterly dividends for 2014, paying out about $4 billion in all dividends since the beginning of 2012. This came in despite a weak top line in the second quarter of 2014.
Yet, the company’s trading volumes rebounded in the third-quarter with 12% growth, followed by increases of 58% in October and 7% in November. The outlook for December also appears reasonable, given the increasing market volatility that would boost trading of derivatives contracts, thereby delivering noticeable organic growth.
The pending GFI Group acquisition, despite a raised deal price, will further bolster the company’s OTC operations in European energy markets and strengthen its client base, particularly, in Asia. Also, it is not expected to pose much risk on debt. With a financial leverage of about 1.0x, the company holds a strong debt profile with no maturities until 2018.
Nonetheless, CME Group’s poor renewals, unstable global capital markets, volatile interest rate, intense competition, demand for low-priced products and lower rate per contract continue to restrict desired growth.
Alongside, higher compensation and benefit costs have adversely affected operating margins, which declined to 57.1% in the first nine months of 2014 from 58.4% in the year-ago period, also well below the historical average of +60%. However, the 15% staff reduction initiated in Oct 2014 should reduce expenses and improve margins going forward.
Meanwhile, capital expenditure for business investments and regulatory compliance has been dragging the operating cash flow downward, plunging 12.2% from the prior-year period in the first nine months of 2014. While management reduced capital expenditure guidance for 2014, it remains about 11% higher than the 2013-level.
Earning Review
This Zacks Rank #3 (Hold) stock has delivered negative earnings surprises in two of the last four quarters with an average miss of 1.5%. However, the company’s third-quarter 2014 earnings of 84 cents a share outshone the Zacks Consensus Estimate by 2.4% and the year-ago quarter figure by 12%.
Overall, a favorable risk-reward profile in the near term led to some upward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 and 2015 moved north by 2.2% and 1.9% to $3.30 and $3.78 per share, respectively, in the last 60 days. On a year-over-year basis, earnings are expected to rise by 8.2% and 14.5% in 2014 and 2015, respectively.
Moreover, the Most Accurate estimate for CME Group’s 2014 earnings currently stand at $3.33 a share, resulting in an Earnings ESP of +0.9%, indicating an earnings beat.
CME Group Hits 52-Week High
Shares of CME Group scaled a new 52-week high of $92.30 on Dec 18, buoyed by a steady growth momentum.Notably, the stock appreciated about 17.6% since the beginning of 2014.
Yesterday’s closing price represents a solid six-month return of about 27.7%, against 8.8% clocked by the Nasdaq index. While 2.19 million shares exchanged hands in the latest trading session, the average volume of shares traded over the last three months stands at approximately 1,633K.
Key Picks in the Sector
While we remain at the periphery with regard to CME Group at present, investors interested in the financial sector could consider stocks like Markit Ltd. (MRKT) and CBOE Holdings Inc. (CBOE). Both these stocks carry a Zacks Rank #2 (Buy).
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