Saturday, March 24, 2012

CME Group (CME) 2012 Review

The CME Group is the largest futures exchange in the US and the largest clearinghouse in the world for trading futures and options on futures. 

The company earns a 6%+ return on equity which is expected to trend back toward its historical 20%+ rate as it amortizes the goodwill it incurred as a result of recent acquisitions; it has grown its earnings and dividends 20-30% over the last five years. That record should continue because:

(1) CME has the most diverse and widest array of products of any exchange in the world and is experiencing strong growth across that range of products. That growth has been achieved from:

(a) acquisitions [Chicago Board of Trade, BM&F Bovespa exchange in Brazil, Credit Market Analysis and the New York Mercantile Exchange],

(b) technological and new product innovation [e.g. On-The-Run Treasury futures]

(c) the recent joint venture with McGraw Hill provides access to a huge pool of assets,

(d) clearing and transaction fees and services.

(2) operating leverage resulting from the increased revenue capture and scalability gained from electronic trading,

(3) geographic expansion particularly in emerging markets.


(1) vulnerability to trading volumes,

(2) exposure to interest rate volatility,

(3) low barriers to entry in electronic trading.

CME is rated A by Value Line, carries about an 9% debt to equity ratio and its stock yields approximately 2.5%.

Statistical Summary

Stock Yield Dividend Growth Rate Payout Ratio # Increases Since 2002
CME 2.5% 6% 29% 7
IND 1.2 6* 12 NA

Debt/Equity ROE EPS Down Since 2002 Net Margin Value Line Rating
CME 9% 7% 1 38% A
IND 160 11 NA 14 NA

*most companies in CME’s industry don’t pay dividends


Note: CME stock made a good initial move off its March 2009 low, quickly surpassing the down trend off its December 2007 high (red line) and the November 2008 trading high (green line). However, it soon (December 2009) broke the up trend off its March 2009 low, resetting into a trading range and struggling to trade above the November 2008 trading high. Long term the stock is in a trading range (straight blue lines); it is also in an intermediate term trading range (purple lines). The wiggly lines are Bollinger Bands. The Dividend Growth and Aggressive Growth Portfolios own full positions in CME. The upper boundary of its Buy Value Range is $164; the lower boundary of its Sell Half Range is $530.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.