1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

Our Future could be in ‘Futures’ - CME Group

December 26, 2008 | About:

Dec. 26, 2008 price $181.90 (12:50 PM EST)

Yield = $1.15 quarterly = 2.53%

52-week range: $155.46 (Nov. 21, 2008) - $692.50 (Dec. 26, 2007)

CME Group [formerly - the Chicago Mercantile Exchange] completed its acquisition of the New York Mercantile Exchange to become America’s largest futures exchange as well as the world’s biggest clearing organization for trading futures and options on futures. The four major areas of exchange involve interest rates, foreign exchange, equities and commodities.

Last year these shares were absolute market darlings hitting their all-time high of $714.50 last December on full year earnings that came in at $15.77/share. Investors then were willing to pay over 45 times trailing earnings to participate in the future growth of this business.

Fast forward one year and now CME shares are offered at $181.90 with expected 2008 EPS of $16.47 making the current multiple a very reasonable 11.1x. Ironically, all the ‘investors’ who loved it at almost four times today’s quote are now uninterested.

Here are the per share numbers for CME as reported by Value Line for the past six years. 2008 data includes consensus estimates for Q4 ending Dec. 31, 2008:

Year ….… Sales …..… C/F ….…. EPS …... Div …… Avg. P/E

2003 …… 16.28 …… 5.32 ….… 3.60 ….. 0.63 ……. 17.2x

2004 …… 21.45 …… 7.98 ….… 6.38 ….. 1.04 ……. 21.3x

2005 …… 26.61 ……10.75 ….…8.81 ….. 1.84 ……. 30.6x

2006 …… 31.29 ……13.78 …...11.60 …. 2.52 ……. 40.0x

2007 …… 32.96 ……14.94 …...15.77 …. 3.44 ……. 36.6x

2008 …… 42.00 ……18.01 …...16.47 …. 4.60 ……. 23.5x

The IPO for CME Group came on Dec. 6, 2002 in depressed market conditions similar to today. Buyers then paid $35 at the offering price on 2002 EPS of $3.26. That 10.74 multiple turned out to be a bargain as CME shares rocketed to $79.30 by year end 2003 and to $396.90 in less than three years. With the current valuation the lowest since that IPO I feel this is a good time to be accumulating shares.

Zack’s is carrying a 2009 estimate of $17.14 which accounts for the increased number of outstanding shares due to the ‘cash plus shares’ deal to buy the NY Mercantile Exchange.

Even fifteen times next year’s estimate would bring these shares back to $257 or plus 41% from today’s quote. That’s actually a very conservative 12-month target as the dead lows for these shares in 2006, 2007 and 2008 (prior to the last few months) were $354, $497, and $282 respectively.

The latest Value Line report assigned CME a financial strength rating of ‘A’ and gave them a 90th percentile ranking for ‘earnings predictability’ [100th being best].

The company is cash rich and their only long-term debt is the newly issued $1.3 billion in senior debt used to close on the NY Merc deal.


If you’re still hesitant to commit you might want to try this 12.5 month combination:

………………………………...................……….. Cash Outlay ……......……. Cash Inflow

Buy 100 shares CME @ 181.90 ……........…. $18,190

Sell 1 Jan. 2010 $200 Call @ 38.50 ……………………….................…….. $3,850

Sell 1 Jan. 2010 $170 Put @ 43.00 ……………………....…...........……... $4,300

Net Cash Out-of-Pocket ……………………................……..$10,040

If CME shares rise to $200 or higher (up 10% from today’s price) by

the expiration date of Jan. 15, 2010:

Your call will be exercised.

You will sell for $200/share and collect $20,000.

Your $170 put will expire worthless (a good thing for you as a seller).

You will have no further option obligations.

You will have $20,460 (including dividends of $460) for an original cash outlay of $10,040.

That's a best-case scenario total return of 103.78% on shares that only needed to rise by 10% or better.

If CME shares are unchanged on expiration date in Jan. 2010:

Your $200 call will expire worthless.

Your $170 put will expire worthless.

You will have no further option obligations.

You will continue to hold 100 shares of CME worth $18,190.

You will have collected $460 in dividends.

You will hold stock and cash worth $18,650 for your $10,040 net cash outlay.

That's an 82.79% total return on shares that did not move.

What’s the downside risk?

If CME finished under $170/share you would be forced to buy another 100 shares for an additional $17,000 cash outlay.

Break-even on this is figured as follows:

On the original 100 shares it’s your cost of $181.90 less the $38.50 call premium = $143.40/share. That’s 21.16% below your purchase price.

On the $170 put it’s the strike price of $170 less the $43 put premium = $127/share. That’s 30.18% under your original purchase price.

The break-even point on the whole trade is the average of $143.40 and $127 = $135.20/share. That’s 25.67% below your initial purchase price.

If CME shares go up, stay unchanged or even decline by as much as 25% you’re in good shape.

Disclosure: Author owns shares and is short puts on CME Group.

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 2.2/5 (13 votes)


Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
CME Group and Federal Reserve Bank for NY determine CME meets regulatory requirements to clear credit default swaps.

The company announces that it has passed two key regulatory hurdles to commence clearing OTC credit default swaps through CMDX, a joint venture co with Citadel Investment Group.

Regulatory reviews with the Federal Reserve Bank of New York and the CFTC are complete. CME Group has had discussions with the SEC and is currently in the SEC review process. Additionally, CME Group and Citadel have finalized their definitive agreement for the joint venture.

CME shares closed today at $212.58 up about 17% in the holiday shortened trading week.
Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
Clearinghouses move forward.

Nasdaq OMX Group (NDAQ) has opened a derivatives clearinghouse and has started clearing over-the-counter contracts tied to interest rates.

The clearinghouse will be competing with rival platforms operated by Chicago's futures giant CME Group (CME) and European clearing company LCH.Clearnet.

Separately, derivative exchange operators CME Group and InterContinentalExchange (ICE) are preparing to launch their respective CDS clearinghouses later this month once they receive final approvals from U.S. regulators.
Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
Increased activity at the CME has made investors start coming back to these shares.

CME closed at $238.01 yesterday.
Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
As expected, Treasury urges centralized clearing for the vast majority of over-the-counter derivatives, and regulation of derivatives dealers.

CME gained 6% on the news today.
Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
Too bad they didn't do this about 100 points lower...

May 14, 2009, 7:43 a.m. EST

CME Group gets upgrade from J.P. Morgan

NEW YORK (MarketWatch) -- Analysts at J.P. Morgan lifted their rating Thursday on futures-exchange operator CME Group Inc. (CME 277.70, +3.60, +1.31%) to neutral from underweight, citing possible benefits from the Treasury Department's plan to regulate over-the-counter markets.

"We view CME -- as the dominant clearing house in the U.S. with expertise in FX, interest rate, and equity futures products -- as a likely beneficiary," they wrote. "We believe CME is well positioned to benefit from the growth in the exchange-traded market, although the timing of this revenue stream is uncertain given the likelihood of dealer resistance in Washington." Shares of CME ended Wednesday at $274

Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
You heard it hear first [and $87 /share cheaper!]...



CME Group Can Barrel Higher


Even if new CFTC limits hurt the exchange's oil trading business, its shares are priced to buy.

THE U.S. COMMODITY FUTURES Trading Commission (CFTC) said Tuesday that it would conduct hearings this month and next to determine whether to impose limits on the ability of speculators to trade in oil and other commodities.

Since then, shares of CME Group (ticker: CME), the old Chicago Mercantile Exchange, have fallen 10% to a recent $268.18 and are now down almost 40% from their 52-week high.

Investors are scared because limits could cut CME's customer base and the 23% of revenue that it derives from energy derivatives trading.

However, the vast bulk of CME income is from trading in futures contracts tied to interest rates, and that business should recover nicely when lending returns in earnest.

Moreover, CME is a necessary forum for hedging the direction of a lot of things, not just oil, and it's far less dependent on speculation in oil markets than is IntercontinentalExchange (ICE), which was founded in 2000.

ICE shares have fallen even further on the CFTC worries, declining 22% through yesterday's close

And energy derivatives account for 23% of revenue at CME, compared to 58% at ICE, according to estimates by Citigroup analyst Donald Fandetti.

Yes, a curtailment of trading in energy futures could affect the exchange. However, much more depends on the mortgage market, for example, rebounding. A 5% reduction in energy trading volume would result in a 23-cent-per-share profit cut for CME, and a 20-cent hit for ICE, Fandetti wrote Thursday morning in a note to clients.

So far, there've been no drastic reductions in sales or profit estimates. Daniel Fannon with Jefferies & Co. yesterday cut his earnings-per-share estimate for this year from $13.70 to $13.45, according to Thomson Reuters.

However, CME gets almost half its trading volume from futures contracts used to hedge the direction of inflation. That kind of business has fallen off substantially with the downturn in markets that use the hedges, such as the mortgage market.

CME is all about volume, which drives trading revenue. Average daily volume last month at CME was down 20% from the year-earlier period, though it picked up 6% compared to May, wrote William Blair & Co. analyst Mark Lane in a note to clients on Monday.

Most of that decline was the fall in interest-rate derivatives trading. Although CME has failed to be the kind of monopoly in derivatives that its management promised when the firm went public in December 2002, it is nevertheless a barometer of the health in lending overall.

And in bullish times, overall lending has boosted the company's fortunes and its stock. Consider that CME shares have risen sixfold since their IPO price even as revenue rose by as much.

Revenue is expected to rise 3% this year and 8.6% next year, and profit, which will likely fall 18% this year, is forecast to rebound 16% in 2010.

CME stock trades at roughly 20 times expected 2009 earnings of $13.39 and 17 times 2010 earnings of $15.58 per share. That's not bad for a company that should see a rebound in profit of 16% next year after a plunge of 18% this year.

Ultimately, markets and producers need a way to hedge prices, whether its oil or soybeans or interest rates. CME fulfills that function, and probably will for some time to come. Buying the stock now could result in your portfolio being energized once lending revives.

Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
CME Group's 2Q profit rises; beats expectations.

All Associated Press newsCHICAGO (AP) - CME Group Inc. said Thursday its second-quarter profit jumped 10 percent due to the company's expanding operations. The exchange operator's profit beat analysts' expectations.

The company's second-quarter results include operations at the New York Mercantile Exchange, which were not included in the year-ago figures. CME Group acquired the New York Mercantile Exchange during the third quarter of 2008.

Net income for the quarter ended June 30, rose to $222 million, or $3.33 per share, from $201 million, or $3.67 per share, during the same quarter last year. Earnings per share declined despite an increase in profit because CME Group had more shares outstanding during the most recent quarter.

When the New York Mercantile Exchange's results are included in the year-ago figures, CME Group and the New York Mercantile Exchange's combined profits actually fell 15 percent from the year-ago period.

Analysts polled by Thomson Reuters, on average, forecast earnings of $3.23 per share for the quarter on revenue of $651.5 million.

CME Group's revenue increased 15 percent, but still fell short of expectations. Revenue totaled $648 million during the second quarter, compared with $563 million during the year-ago period.

Revenue increased primarily due to growth in clearing and transaction fees as the company operated more exchanges during the most recent quarter. CME Group's clearing and transaction fee revenue increased 17 percent to $536.8 million during the second quarter, from $458.5 million during the same quarter in 2008.

Factoring in the New York Mercantile Exchange's results from the year-ago period, revenue declined 14 percent amid slowing trading volume.

CME average daily trading volume fell 21 percent to about 8.8 million trades per day during the second quarter. New York Mercantile Exchange volume dipped 8 percent to about 1.7 million trades per day.

Despite the year-over-year decline in trading, CME Group said it started to see a recovery in trading at the end of the second quarter as markets have begun to strengthen.

"As the economy showed signs of stability, we saw increased volumes in June, particularly in interest rates, foreign exchange and agricultural markets," Terry Duffy, CME Group's executive chairman, said in a statement.

Shares of CME Group rose $1.05 to $273.09 in premarket trading Thursday. Shares closed Thursday at $276

Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
What this Little-Known Metric is Signaling Investors to Buy

Monday, September 21, 2009 -

Brad Briggs is a writer and editor at StreetAuthority. A graduate of Baylor University, Brad joined StreetAuthority in 2008 after working in the banking industry.

It's amazing what a simple metric can tell you about a company.

Especially an unflappably accurate metric. This yardstick cuts to the chase and tells you exactly how well a company performs.

It's in every company's SEC filings.

It's on nearly every financial website.

Most investors skip right over it.

I'm talking about operating margins. It tells you how much a company makes on each dollar it brings in -- before accounting for taxes and interest. The higher the number is, the better.

The only caveat? Consistency. When you look at operating margins, the hallmark of a good stock pick is a consistent or steadily climbing operating margin.

Consider Moody's Investor Service (NYSE: MCO). The company is one of only three players in the credit-ratings business. For years, Moody's had what Warren Buffett refers to as a wide moat -- a sustainable competitive advantage that protects the company's ability to generate profits. But that moat has sprung a leak because of criticism that it couldn't objectively rate securities leading up to the subprime meltdown. This has filtered down to the bottom line at Moody's. Operating margins have declined -25% during the past two years.

One company that has kept its margins steady is CME Group (Nasdaq: CME) -- the most profitable company in the S&P with an operating margin of 62%. It also has a near-monopoly in a market that is growing at a scorching pace.

CME Group runs three of the largest futures exchanges in the world: The Chicago Mercantile Exchange -- where the "CME" in its name comes from -- and the New York Mercantile Exchange (the NYMEX) and the Chicago Board of Trade. These marketplaces are where commodities, stock-index futures and major currencies trade.

CME charges a fee for every trade on its exchanges. The more volume these exchanges have, the more fees CME collects. Traders flock to highly liquid exchanges because they offer favorable prices, which gives the company a distinctive advantage. This barrier to entry -- an effective corner on U.S. commodity and currency trading -- is why CME has only one major competitor in the U.S.

Here's another nifty facet of CME's business model: It makes money twice on most of the securities it offers. Many of CME's contracts can't be transferred. That means you can't buy futures on one exchange and sell them on another. There are a million other investors to trade with, but there's only one place to execute the buy and sell orders.

By now you may have heard that the Commodities Futures Trading Commission wants to regulate some commodity and derivative trading. Regulators are worried that speculation has caused higher energy prices. A lack of transparency in the way derivatives are handled has also caused some grief. (Just ask AIG.)

The CFTC wants to limit some trading. Worries that this may affect liquidity on exchanges have weighed on CME's shares. But trading demand for oil, agricultural commodities and metals has soared in recent years, and it's unlikely to let up any time soon.

CME is also aggressively seeking expansion in foreign markets. The company recently announced that it entered talks with Bolsa Mexicana de Valores, the second-largest exchange in Latin America, to acquire a minority stake in the Mexder derivatives exchange. Don't be surprised if CME makes additional deals like this in the future. The more volume, the more fees it collects.

Investors should take notice any time Uncle Sam gets involved in Wall Street. But in this case, those fears have CME shares trading for just 20 times earnings. That's about the S&P average right now, but it's cheap for these shares, which have traded for 35 times earnings during the past five years. (The shares need to climb +75% to reach that level.)

A buying opportunity like CME is rarely seen for a company that makes 62 cents for every dollar it brings in. August trading volumes were up +5% from July to 10.2 million contracts a day and will continue to rise once a full recovery takes place.

Brad Briggs

Staff Writer


Please leave your comment:

Performances of the stocks mentioned by Dr. Paul Price

User Generated Screeners

carter2u2Small Cap No Debt
bkw82Predictable/ebitda 10/52 week
pbarker46Hist. High Yield
andrewgu999valleylink - gogogo
DBrizanROTA ultimate18nov2017 1041p
DBrizanROTA18nov2017 1041p
DBrizanROTA18nov2017 1035p
DBrizanROTA18nov2017 1032p
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat