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Is CME Group a Buy?

By Eric Volkman – Updated May 1, 2019 at 11:58AM

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There are many things to like about the securities market operator.

The securities market operator segment of the stock exchange is small but vibrant. One of the top companies in this little club is CME Group (CME -0.86%)

Earlier this year, I dived into the operations and the stock appreciation prospects of CME Group's rival, Cboe Global Markets (CBOE -0.31%). Now it's CME Group's turn; here's my two cents on whether it's a worthwhile investment these days.

Securities market display

Image source: Getty Images

A good trade

CME Group's concentration is markets that facilitate futures and options trading. Its operations comprise four component securities markets:

  • CME -- The core asset, a futures and options powerhouse. Other asset classes such as equities and foreign-exchange products can also be traded here.

  • CBOT -- This stands for Chicago Board of Trade, which, in CME Group's words, specializes in "agricultural, equities, energy and interest rate products."

  • NYMEX -- New York Mercantile Exchange, an exchange for metals and energy securities.

  • COMEX -- Commodity Exchange, a metals trading market.

Since CME Group as a whole is an owner of securities markets, it makes the bulk of its money on clearing and transaction fees. In 2018, these were responsible for 85% of the company's $4.3 billion in revenue; 10% of that total came from market data and information services; and the remainder fell into the "other" category.

Last year was a great year to be an exchange operator. That's because such companies thrive on volume, since they get a little piece of every transaction made on their markets. Securities trading was volatile last year (read: busy), so as a whole the peer group housing CME Group and Cboe Global Markets did very well.

CME Group saw its revenue rise by 18% on a year-over-year basis in 2018 to the aforementioned $4.3 billion. Due to the impact of tax reforms that impacted 2017 results, 2018's net profit dropped steeply to just under $2 billion -- a more than 50% drop from the previous year.

Probably a better line item to gauge performance is pre-tax income, which was up 10% to nearly $2.8 billion.

The rich man in the middle

CME Group has historically been very profitable, since it's essentially a big and sprawling middleman business. Potential investors shouldn't worry about the company's moneymaking prowess; as long as most of its markets have at least something of a pulse, CME Group should earn a buck. We can say the same for Cboe Global Markets and the rest.

Whether you're willing to buy CME Group now depends on whether you're a bull or bear regarding future market volume. If you feel that futures and derivatives markets will remain vibrant, or even intensify, the stock is a compelling potential purchase.

Analysts seem cautiously optimistic about the proximate future. Although they're collectively estimating only marginal per-share net profit growth this year, from 2019 to 2020 they believe this will rise by a respectable 10%. Revenue's a bit of a different story; those prognosticators think it will increase by 15% this year and 6% next.

Meanwhile, the stock is priced at a forward price-to-earnings ratio of 23 and change, suggesting it's currently overvalued (generally, a stock is considered fairly priced if expected growth is more or less in line with forward P/E)..

That said, there's another consideration here -- the dividends. CME Group pays a not-especially high quarterly distribution of $0.75 per share. But the real meat on that bone is the annual variable dividend, a fiscal-year-end payout started in 2012 that depends on operational and other results.

The 2018 edition (paid in January 2019) was $1.75 per share, which adds nicely to the company's overall dividend yield (2.6%, if we annualize the current regular dividend and mix in the annual variable). This once-a-year special, however, has been higher in the past -- for 2017 it was $3.50 per share, and in 2016 it was $3.25.

Still, even at the reduced rate, the annual variable dividend gives the company a nice overall yield figure. I like that, and since I'm more bullish than most analysts about the future of securities markets, I like CME Group in general. This stock would be a buy for me.

 

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets Inc and CME Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

CME Group Inc. Stock Quote
CME Group Inc.
CME
$177.13 (-0.86%) $-1.54
Cboe Global Markets, Inc. Stock Quote
Cboe Global Markets, Inc.
CBOE
$117.37 (-0.31%) $0.36

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