There aren't many business sectors that can do well in both bull and bear markets. One that has in recent times is the small but vibrant segment of securities market operators. Two major players in this arena are CME Group (CME 0.60%) and Intercontinental Exchange (ICE 0.52%). Here's the one I think is the superior investment at the moment.
Check out the latest Intercontinental Exchange and CME earnings call transcripts.
Market makers
If you're even slightly familiar with the world of stocks, you're familiar with Intercontinental Exchange's business. The company's crown jewel is the New York Stock Exchange, which it fully owns. Over the years, however, Intercontinental Exchange has managed to snap up a big set of stock markets, options exchanges, clearing houses, and associated assets.
ICE asset the New York Stock Exchange. Perhaps you've heard of it? Image source: Getty Images.
The first part of CME Group's name stands for Chicago Mercantile Exchange, the big and well-established futures and options marketplace. Like Intercontinental Exchange, CME Group has bulked up through acquisitions over the years; it, too, is diversified across various types of securities.
The core revenue generator for both companies is transaction and clearing fees. With their mountains of data, Intercontinental Exchange and CME Group also provide data and/or information services to their clients. Although this is the No. 2 activity for both companies, ICE draws in significantly more as a proportion of total revenue (42% in fiscal 2018) than its rival (10%).
Since both companies are basically middlemen in their core business, each operates reliably in the black. Although this profitability can swing wildly at times, Intercontinental Exchange and CME Group usually post impressive margins. Broadly speaking, CME Group has had the better recent numbers, within a narrower range. Here's the trailing-12-month scorecard:
CME Profit Margin (TTM) data by YCharts.
An important variable
The performance of the two businesses -- and their stocks -- depends to a great degree on the action in the securities markets they own. We should bear in mind that this is volume-dependent -- it's heavily reliant on how many securities are traded, no matter whether the relevant markets are going up or down.
Happily for long-term holders of both Intercontinental Exchange and CME, they've been frothy for years. This is reflected in revenue that has generally continued to go north for the two companies, as well as profitability.
If securities markets as a whole continue to be lively, both companies should keep riding the wave. The thing is, there are many investors who believe this, which helps explain why the two stocks have ramped up in price lately. Neither is cheap, trading at five-year PEG ratios over 2 (a ratio of 1 is considered to be fair value for a stock).
Analysts believe their prospects are about even. Collectively, they estimate that net profit growth for each stock will be in the low-teen percentage in the next fiscal year, and that revenue growth will clock in at 5% to 6%.
Ultimately, then, we have to decide this contest on another factor. And for me, that's dividend policy. Intercontinental Exchange and CME Group both distribute a quarterly payout, which, not unusually for the finance sector, has a relatively low annual yield (1.5% for the former, and 1.7% for the latter, against the 1.9% average of dividend-paying stocks in the S&P 500).
However, since 2012, CME Group has adopted a variable dividend policy on top of this. It's a means of returning what the company terms "excess cash" to shareholders. The amount for 2018 was $1.75; if we combine this with all quarterly payouts for that fiscal year, we get a yield of 2.6%, quite a respectable haul.
So although I think both stocks are a bit pricey these days, if I had to pull the trigger on one, I'd choose CME Group.
