Volatile interest rates and currencies are playing havoc with the real economy, but they're just what the doctor ordered for the Chicago Mercantile Exchange (NYSE:CME). This morning the exchange announced record quarterly results, sending the stock some 4% higher and capping a 76% run-up since the company's IPO in December.
In just its second quarter as a public company, CME announced record revenues and profits that beat the consensus analyst estimates. Net revenues of $142.4 million were up 32% from the year-ago quarter, while net income jumped an incredible 67%. Both reflect strong trading volumes in CME's three largest markets: interest rates, equities, and foreign exchange. Overall average daily volume increased 23% year over year to nearly 2.7 million contracts.
CME offers the first "public" report of the strong economics of financial exchanges. The first exchange to be traded publicly, CME is the largest futures exchange in the United States and the world's second largest for trading futures and options on futures. Like all hubs of trading -- consider, for example, eBay (NASDAQ:EBAY) -- CME generates superb free cash flow (FCF) and enjoys the benefit of a formidable moat against competitors.
Over the past three years, CME's revenues have grown 30% annually. FCF has grown even faster, thanks to the economies of scale afforded by the high-fixed, low-variable cost nature of exchange technology. CME's scale is reaching the point where cash profitability is starting to really explode. Over the past year, the exchange generated about $109 million in FCF on revenues of $513 million, for an FCF margin of 21%. That's stellar.
CME's cash-generating ways, along with the proceeds of its initial public offering, have resulted in a cash hoard of $392 million. Subtracting that from the current market cap of $2.6 billion leaves an enterprise value (EV) of $2.2 billion. That puts CME at an EV-to-FCF multiple of about 20. Not bad at all for a cash-rich business with strong growth and high barriers to entry.
