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CME Group's Efficiency Continues to Reward Investors

By Simon Erickson - Oct 30, 2018 at 10:33AM

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CME Group's reported a 22% increase in adjusted earnings per share in the third quarter, driven by modest growth and efficiency improvements.

Stock market volatility has returned! As my colleague Sean Williams points out, the S&P is just a few points away from hitting its 37th official correction of at least 10% since 1950.

One company that could benefit from this increased speculation is CME Group (CME 1.53%), whose options and derivatives exchanges often see a significant boost in trading volumes during volatile times.

Recent volatility aside, CME recently reported results from a much calmer third quarter -- which saw modest increases across the company's business. 

Let's take a closer look at the results.

a chart depicting rising and falling stock prices, representative of CME group's exchanges business

Image source: Getty Images.

CME Group results: The raw numbers

Metric Q3 2018 Q3 2017 Change (YOY)
Revenue $904 million $891 million 2%
Operating income $550 million $568 million (3%)
Adjusted EPS* $1.45 $1.19 22%

Data source: CME Group. *On a fully diluted basis. YOY = year over year.

What happened with CME Group this quarter?

Global trading markets slowed down a bit as compared to the red-hot first quarter earlier this year. But CME's efficiently run ship still showed modest growth in most of its divisions. Total revenue of $904 million was up 2% over last year, with clearing and transaction fee revenue relatively flat at $753 million, market data revenue up 14% to $111 million, and other revenue up 9% to $40 million.

Average daily volume during the quarter was 15.6 million contracts, which was down about 1% compared to last year. Within this, stability in the rising price of oil drove down the number of energy contracts (down 18%), while rising speculation about future moves by the Federal Reserve increased the number of interest-rate contracts (up 5%). CME's interest-rate contracts are still its most popular, and the company is now processing nearly 8 million every day.

Quarterly Average Daily Volume (in thousands) Third Quarter 2018 Third Quarter 2017
Interest rate 7,798 7,424
Equity 2,671 2,624
Energy  2,199 2,693
Agricultural commodity  1,348 1,381
Foreign exchange 944 971
Metal 623 611

Data source: CME Group.

The company's overall average rate per contract was $0.753, up slightly from $0.749 last year. Within this, it derives the highest rate per metal contract and the lowest from interest rate contracts. CME was able to increase prices in its most widely traded contracts.

Quarterly Average Rate Per Contract Third Quarter 2018  Third Quarter 2017  
Interest rate  $0.493 $0.485
Equity $0.761 $0.738
Energy $1.187 $1.072
Agricultural commodity   $1.258 $1.251
Foreign exchange  $0.743 $0.796
Metal $1.379 $1.376

Data source: CME Group.

What management had to say

Chairman and CEO Terrence Duffy noted the strength of CME's interest rate and equities divisions, as well as the company's disciplined cost-cutting moves to help boost earnings per share:

The third quarter improved steadily from July to September, driven by strength in our interest rate, equities and metals product lines. Our solid expense management contributed to adjusted diluted earnings-per-share growth of more than 20 percent in the third quarter. Open interest has continued to rise to more than 128 million contracts, which illustrates the growing need for risk management globally.

Duffy also pointed out on the conference call several of the company's recent initiatives to spur trading volumes -- such as the success of its SOFR and SONIA interest-rate futures, new daily records in its monthly FX Futures and CME FX Link offerings, and a firm launch date this quarter for its new physically delivered WTI Houston crude oil futures contracts.

Looking forward

The Department of Justice has now approved CME's acquisition of NEX Group, which the company believes will close and become fully integrated by year end. NEX Group should give CME a more efficient and consolidated offering in Europe's financial markets. 

CME also paid out another quarter dividend of $0.70 per share, which now yields 1.5% on an annual basis. The company also has a habit of paying a special year-end dividend, which was $3.50 at the end of 2017. 

CME occupies a profitable niche in the financial services industry. The company is making certain divisions more efficient, while strategically growing in others. Investors should watch for average daily volumes and average rates per contract to slowly increase during 2018 and to benefit the company's bottom line.

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