Chicago's massive derivative exchange, the Chicago Mercantile Exchange (NYSE:CME), reported first-quarter earnings yesterday. For the quarter, the company reported revenue of $332 million, up 32% year over year, and net income that increased at a quicker 42% to reach $130 million. Average daily volume on the exchange clocked in at an amazing 6.5 million contracts, a record for the company.
As watchers of the exchange stocks know, though, at this point the story really isn't about whether the companies will do well; it's about whether they can do well enough to keep up with their optimistic price tags. Right now, the Chicago Merc is trading at 42 times its trailing-12-month earnings per share. Though this compares favorably to competitors like CBOT Holdings (NYSE:BOT) and InterContinental Exchange (NYSE:ICE), which are trading at trailing P/Es of 48 and 47, respectively, I wouldn't call it cheap. For perspective's sake, Google, which is pretty used to getting the "overpriced" tag, trades at 40 times its trailing earnings.
So part of the reason that the CME was able to post such impressive numbers and still see its stock fall is because expectations were already high. The CME's reported earnings per share of $3.69 beat analysts' estimates by a commendable $0.37, but revenue for the quarter was shy of what Wall Street was looking for.
One of the key story lines for the Chicago Merc right now is the ongoing attempt to combine with its crosstown neighbor, the Chicago Board of Trade (CBOT). Toward the end of last year, CBOT agreed to merge with the CME to create a combined exchange that would benefit from some $125 million in costs. InterContinental, acting like the brash young exchange it is, crashed that party recently by making an offer for CBOT that topped the CME's bid. As of right now, the CME/CBOT merger is still on, but CBOT investors seem optimistic about a higher price and have pushed the stock up above both bids.
If we invested in a price-free vacuum, this quarter would be great news for Chicago Merc investors. Unfortunately, that's not the case, and even with good financial performance, the stock will likely sag as it did yesterday any time we see the least sign that the exchange's rapid growth could be slowing.
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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Say hello to my little friend -- the Fool's disclosure policy.
