The fourth quarter brought significant market volatility, as investors saw stock prices fall during the final few months of 2018. But CME Group (CME 1.38%), the operator of one of America's largest options and derivatives exchanges, handsomely benefited. Trading volumes related to equity and interest-rate futures tend to spike during volatile times, which is why CME Group enjoyed a boost to its top and bottom lines.
The business recently reported its fourth-quarter earnings. Let's look at the results.
Check out the latest CME earnings call transcript.
Image source: Getty Images.
CME Group results: The raw numbers
| Metric | Q4 2018 | Q4 2017 | Change (YOY) |
|---|---|---|---|
| Revenue | $1,237 million | $900 million | 37% |
| Operating income | $650 million | $537 million | 21% |
| Adjusted EPS* | $1.77 | $1.12 | 58% |
Data source: CME Group. YOY = year over year. *On a fully diluted basis.
What happened with CME Group this quarter?
Put simply, CME Group had an incredible fourth quarter. Its average daily volume (ADV) of 20.8 million contracts marked a 31% increase over last year. It also marked the second highest quarterly ADV in the company's history.
Growth in interest-rate and equity contracts especially stood out, increasing by 37% and 71%, respectively. Significant volatility in the equity markets and speculation related to rising interest rates helped drive the total number of contracts higher. Here's a breakdown of quarterly ADV:
| Metric | Fourth-Quarter 2018 | Fourth-Quarter 2017 |
|---|---|---|
| Interest rate | 10,919 | 7,970 |
| Equity | 4,510 | 2,632 |
| Energy | 2,665 | 2,489 |
| Agricultural commodity | 1,248 | 1,278 |
| Foreign exchange | 942 | 941 |
| Metal | 547 | 616 |
Data source: CME Group. Numbers in thousands.
Equity and interest-rate contracts typically carry a lower rate than other divisions do, so CME's overall average rate per contract dropped 7% to $0.697:
| Metric | Fourth-Quarter 2018 | Fourth-Quarter 2017 |
|---|---|---|
| Interest rate | $0.475 | $0.467 |
| Equity | $0.715 | $0.768 |
| Energy | $1.150 | $1.133 |
| Agricultural commodity | $1.261 | $1.251 |
| Foreign exchange | $0.720 | $0.785 |
| Metal | $1.428 | $1.315 |
Data source: CME Group.
What management had to say
Chairman and CEO Terrence Duffy noted the market demand for using CME's products to manage risk during market volatility, as well as his plans to fully integrate the recent acquisition of UK-based trading company NEX Group to create a stronger and more valuable enterprise:
During the fourth quarter, elevated volatility and increased customer demand for our diverse risk management products resulted in strong trading volumes, exceeding 20 million contracts per day. We set annual average daily volume records in four of our six asset classes as well as in total options and demonstrated solid expense control during 2018.
In November, we completed the NEX acquisition, which positions us to launch innovative new products to an expanding global customer base across futures, options, cash and OTC markets. Looking ahead to 2019, we're extremely focused on the continued integration of these two great companies and expect to unlock additional value for our customers and shareholders.
Looking forward
Duffy warned investors that CME's trading has already slowed significantly in 2019, averaging around 17 million contracts per day. However, options contracts appear to be gaining popularity this year, already accounting for 22% of total volume this year, up from 20.5% in 2018.
CFO John Pietrowicz also brought attention on the conference call to the company's financial discipline. During the past two years, CME has increased revenue by $580 million, excluding the NEX acquisition, while adjusted expenses grew by only $55 million during the same time frame. This performance displays the scalability of CME's platform, where revenue generated by additional trading volume very quickly falls to the bottom line.
Investors should expect the scalability to continue as the company's platform becomes even more globally integrated. CME's acquisition of NEX Group closed in November, and NEX already contributed $134 million of revenue in the fourth quarter. The acquisition is expected to give CME a more consolidated presence in European markets.
Finally, the company paid out a $0.70 dividend in the fourth quarter and an additional $1.75 special dividend in January. Even with the stock now yielding 1.7%, CME is still paying out less than half of earnings as a dividend and could have plenty of room to raise it in the future.
