Market volatility has been extremely high this year, but that's not a bad thing for CME Group (CME -0.97%), which runs one of the leading derivatives exchanges in the country. It started out as the Chicago Mercantile Exchange, but has since grown through mergers with the Chicago Board of Trade, the New York Mercantile Exchange, and the Commodities Exchange.
The historic volatility of the first quarter, fueled by the coronavirus pandemic, led to record trading on CME's exchange, which means more transaction fees. The stock price is down about 8% year to date, but the company posted strong first-quarter earnings. Is CME Group a buy?
Record trading volumes in first quarter
CME Group makes most of its income from transaction fees generated through trades on its exchange. In the first quarter, revenue from clearing and transaction fees was $1.3 billion, up 34% from the first quarter of the previous year. That accounted for most of the company's revenue, which was up 29% in the quarter to $1.5 billion. The market data business, which provides companies with real-time information, saw revenue climb slightly to $131 million from $130 million one year ago.
The revenue gains were driven by record trading on the exchange. Cboe Global Markets' Volatility Index (VIX), which measures the frequency and magnitude of stocks' price movements, hit its highest mark since 2008 in March and is still well above normal at about 31.
The CME exchange had an average daily volume (ADV) of 27 million contracts traded, which is 45% more than the first quarter of 2019. The ADV in March alone was 32 million contracts -- a record. The biggest spike came from equity indexes, which had an ADV of 6.5 million contracts, up 106% from the previous year. The most volume came from interest rate products at 13.8 million contracts traded, also a record. That represents an increase of 34% from a year ago. Options ADV was 5.4 million contracts, up 41%, and metals ADV was one of the biggest gainers, up 58% with 889,000 contracts traded.
There was also record trading in international markets as the ADV for non-U.S. contracts increased 57% to 7.2 million contracts in the first quarter. Equity trading was up 152% across international markets, while interest rates ADV increased 46%. The Europe, Middle East, and Africa (EMEA) region had an ADV of 5.4 million contracts, up 54%, while Asia Pacific had an ADV of 1.6 million contracts, which marked a 73% increase from the first quarter a year ago. The ADV in Latin America was 182,000 contracts -- a 21% spike.
This all resulted in earnings of $766 million in the first quarter, a 54% increase over the first quarter of last year. Earnings per share was also up 54% to $2.14 per share, which topped analysts' estimates.
There's a lot to like for investors
CME Group has a fairly wide competitive moat as one of only a few derivatives exchanges and the market leader in the U.S. As long as there are markets and trading, its earnings potential is rock-solid. It has been a steady performer over the years, even when volatility is low, returning 11.7% annually over the last 10 years. With $1 billion in cash and $3.5 billion in debt as of March 31, it has a good debt-to-equity ratio and a solid balance sheet. Its price-to-earnings ratio is fairly high around 27 times earnings, but it should remain profitable, particularly this year as volatility remains high. It's a great company that has performed throughout various market cycles and warrants strong consideration.