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Better Buy: CME Group vs. Cboe Global Markets

By Dave Kovaleski - Updated Jan 24, 2020 at 12:34PM

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Two of the leading derivatives exchanges are poised for continued growth, but one is a better buy.

CME Group (CME 0.04%) and Cboe Global Markets (CBOE 0.18%) are two of the world's leading derivatives exchanges. CME Group, the leading futures exchange, formed from the merger of the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and Kansas City Board of Trade. Cboe, founded in 1973 as the Chicago Board Options Exchange, is the leading options trading platform. It's also known for its Cboe Volatility Index, or VIX, which measures market volatility. Both companies make most of their income from product subscriptions and fees generated from trades on their exchanges.

While they play in the same arena, the two companies have had very different performances over each of the past two years. In 2018, CME Group returned 28.8% while Cboe was down 16.3%. Last year, they flipped -- CME was up just 6.7% while Cboe was up 26.7%.

So, as we move into a new year, which stock is a better buy?

A screen showing line graphs and numbers.

Both CME Group and Cboe Global Markets are exchanges for derivatives trading. Image source: Getty Images.

Both stocks exhibit strong growth

First, let's compare the fundamentals of each. In the third quarter, Cboe saw net revenue jump 9% to $294 million year over year, while operating income rose 17% to $147.4 million. Furthermore, net income was up 24% to $105 million. Overall, the company saw a 24% increase in earnings per share to $0.94. It's currently priced at $118 per share, with a price-to-earnings ratio of 25.21.

CME Group, which reported record trading volume in 2019, saw revenue increase 41.2% to $1.28 billion, while net income was up 54% to $636 million. Earnings per share jumped 39% to $1.78 year over year. It's currently priced at about $206 per share with a price-to-earnings ratio of 36.3. CME's P/E ratio has skyrocketed in the past year and a half, from 12.67 at the end of the third quarter 2018 to about 36 at present, reflecting its strong earnings growth over that time.

Revenue opportunities

When considering which is the better buy, it's important to look at whether these two companies can maintain their growth. Cboe just completed a technology integration project to give customers a single trading platform across all of its markets. The new platform is designed to ease the trading process while improving risk controls. This, company officials believe, will lead to more frequent trading and, in turn, additional revenue opportunities. Last year, Cboe had a record-high average daily volume (ADV) of trades.

This year, Cboe is developing a research platform to help inform customers' investment decisions while providing the company with data and trends to help it develop new products. These initiatives should drive solid incremental growth.

CME Group also experienced a 19.2 million ADV of trading in 2019, which was in line with the previous year. This includes record-high average trading volumes in international markets. International trading volumes grew by 10% overall last year, led by Latin America, where activity grew by 48%. International markets are expected to provide additional growth for CME Group this year and beyond.

Market volatility is good for exchanges, and that should continue, providing both companies with a foundation for continued growth. CME has been a better growth stock over the years and has provided a better dividend than Cboe (but it's close -- CME is currently yielding about 1.4%, while Cboe has a yield of 1.2%, both with reasonable payout ratios). 

While both will continue to deliver gains for investors over the long term, Cboe is more attractively valued and is the better buy right now. But keep in mind, if CME Group dips, that may be a perfect time to buy. 

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Stocks Mentioned

CME Group Inc. Stock Quote
CME Group Inc.
CME
$190.22 (0.04%) $0.07
Cboe Global Markets, Inc. Stock Quote
Cboe Global Markets, Inc.
CBOE
$105.75 (0.18%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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