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CME Group Lags Industry in a Year: Is the Stock a Hold or Fold?
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Shares of CME Group Inc. (CME - Free Report) have gained 6.1% in the past year, underperforming the industry and the Zacks S&P 500 composite’s growth of 20.3% and 23.6%, respectively.
CME Lags Industry and S&P
Image Source: Zacks Investment Research
CME Group’s diversified product portfolio is significantly exposed to extreme interest rate volatility, currency fluctuation, strict government regulations and limited credit availability. The current unstable capital and credit markets can hamper liquidity and cause a decline in customer demand. This poses a concentration risk.
CME has been experiencing an increase in expenses due to higher compensation and benefits, technology expenses, professional fees and outside services, licensing and other fee agreements, depreciation and amortization, and other expenses that weigh on margin expansion. CME also expects expenses, excluding license fees but including cloud migration expenses, to be $1.585 billion in 2024.
CME’s Return on Capital
CME’s return on equity in the trailing 12 months was 12.8%, lower than the industry average of 13.2%. This reflects its inefficiency in utilizing funds to generate income.
Also, the return on invested capital in the trailing 12 months was 0.4%, lower than the industry average of 4.8%.
CME’s Growth Projection
The Zacks Consensus Estimate for CME Group’s 2024 earnings per share indicates a year-over-year increase of 6.4%. The consensus estimate for revenues is pegged at $6.01 billion, implying a year-over-year improvement of 7.7%.
The consensus estimate for 2025 revenues indicates a year-over-year increase of 2.7%, from the corresponding 2024 estimates.
Mixed Analyst Sentiment on CME
Six of the eight analysts covering the stock have raised estimates for 2024 while two have lowered the same over the past 60 days. For 2025, seven of the nine analysts covering the stock have raised estimates while two have lowered estimates over the same time frame.
The consensus estimate for 2024 and 2025 have moved 1.5% and 0.9% north, respectively, in the past 60 days.
Factors Favoring CME Stock
CME Group’s strength lies in its organic growth. It has a 90% market share of global futures trading and clearing services. With increased interest across the entire crypto economy, CME Group is witnessing growth in electronic trading volume and higher adoption of crypto assets. In 2023, 92% of the overall contract volume was generated through electronic trading on the CME Globex electronic platform.
Clearing and transaction fees, which contribute a major share of the top line, continue to benefit from increased volatility that aids trading volumes. CME’s investments are also showing desirable results. It is focusing on improving margins through cost management.
A solid capital position continues to support CME Group in deploying funds for strategic organic initiatives, expanding its product breadth and engaging in capital deployment.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.
CME’s Impressive Dividend History
CME Group, the largest futures exchange in the world in terms of trading volume as well as notional value traded, has been distributing wealth to shareholders by increasing payouts. Solid liquidity supports wealth distribution via dividend payouts, thereby adding to the company’s financial credibility and investor confidence.
Since it commenced the variable dividend policy in early 2012, CME Group has returned approximately $25.2 billion to shareholders in the form of dividends. It has also been increasing dividends each year. With the latest 4.5% increase in February 2024, the company has grown its dividend at a five-year CAGR of 8.9%. Its dividend yield of 2.1% is better than the industry average of 1.5%, making the stock an attractive pick for yield-seeking investors.
In August, its peer, Cboe Global Markets (CBOE - Free Report) , hiked its dividend by 15% to 63 cents per share.
CME Shares are Affordable
CME Group is trading at a discount compared with the industry average. It presents a compelling investment opportunity with its attractive forward 12-month price-to-earnings ratio of 21.76X, lower than the industry average of 23.63X.
In comparison, its peers like Nasdaq, Inc. (NDAQ - Free Report) and Intercontinental Exchange Inc. (ICE - Free Report) are currently trading at forward 12-month price-to-earnings of 24.68X and 25.10X, respectively.
Conclusion
A solid global presence, compelling product portfolio, increased electronic trading, focus on over-the-counter clearing services and solid financial position make CME worth retaining in one’s portfolio.
However, an unfavorable return on capital and ongoing expense growth suggest a cautious approach. Despite this, given its growth prospects and effective capital deployment, the time appears right for potential investors to hold on to this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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CME Group Lags Industry in a Year: Is the Stock a Hold or Fold?
Shares of CME Group Inc. (CME - Free Report) have gained 6.1% in the past year, underperforming the industry and the Zacks S&P 500 composite’s growth of 20.3% and 23.6%, respectively.
CME Lags Industry and S&P
Image Source: Zacks Investment Research
CME Group’s diversified product portfolio is significantly exposed to extreme interest rate volatility, currency fluctuation, strict government regulations and limited credit availability. The current unstable capital and credit markets can hamper liquidity and cause a decline in customer demand. This poses a concentration risk.
CME has been experiencing an increase in expenses due to higher compensation and benefits, technology expenses, professional fees and outside services, licensing and other fee agreements, depreciation and amortization, and other expenses that weigh on margin expansion. CME also expects expenses, excluding license fees but including cloud migration expenses, to be $1.585 billion in 2024.
CME’s Return on Capital
CME’s return on equity in the trailing 12 months was 12.8%, lower than the industry average of 13.2%. This reflects its inefficiency in utilizing funds to generate income.
Also, the return on invested capital in the trailing 12 months was 0.4%, lower than the industry average of 4.8%.
CME’s Growth Projection
The Zacks Consensus Estimate for CME Group’s 2024 earnings per share indicates a year-over-year increase of 6.4%. The consensus estimate for revenues is pegged at $6.01 billion, implying a year-over-year improvement of 7.7%.
The consensus estimate for 2025 revenues indicates a year-over-year increase of 2.7%, from the corresponding 2024 estimates.
Mixed Analyst Sentiment on CME
Six of the eight analysts covering the stock have raised estimates for 2024 while two have lowered the same over the past 60 days. For 2025, seven of the nine analysts covering the stock have raised estimates while two have lowered estimates over the same time frame.
The consensus estimate for 2024 and 2025 have moved 1.5% and 0.9% north, respectively, in the past 60 days.
Factors Favoring CME Stock
CME Group’s strength lies in its organic growth. It has a 90% market share of global futures trading and clearing services. With increased interest across the entire crypto economy, CME Group is witnessing growth in electronic trading volume and higher adoption of crypto assets. In 2023, 92% of the overall contract volume was generated through electronic trading on the CME Globex electronic platform.
Clearing and transaction fees, which contribute a major share of the top line, continue to benefit from increased volatility that aids trading volumes.
CME’s investments are also showing desirable results. It is focusing on improving margins through cost management.
A solid capital position continues to support CME Group in deploying funds for strategic organic initiatives, expanding its product breadth and engaging in capital deployment.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.
CME’s Impressive Dividend History
CME Group, the largest futures exchange in the world in terms of trading volume as well as notional value traded, has been distributing wealth to shareholders by increasing payouts. Solid liquidity supports wealth distribution via dividend payouts, thereby adding to the company’s financial credibility and investor confidence.
Since it commenced the variable dividend policy in early 2012, CME Group has returned approximately $25.2 billion to shareholders in the form of dividends. It has also been increasing dividends each year. With the latest 4.5% increase in February 2024, the company has grown its dividend at a five-year CAGR of 8.9%. Its dividend yield of 2.1% is better than the industry average of 1.5%, making the stock an attractive pick for yield-seeking investors.
In August, its peer, Cboe Global Markets (CBOE - Free Report) , hiked its dividend by 15% to 63 cents per share.
CME Shares are Affordable
CME Group is trading at a discount compared with the industry average. It presents a compelling investment opportunity with its attractive forward 12-month price-to-earnings ratio of 21.76X, lower than the industry average of 23.63X.
In comparison, its peers like Nasdaq, Inc. (NDAQ - Free Report) and Intercontinental Exchange Inc. (ICE - Free Report) are currently trading at forward 12-month price-to-earnings of 24.68X and 25.10X, respectively.
Conclusion
A solid global presence, compelling product portfolio, increased electronic trading, focus on over-the-counter clearing services and solid financial position make CME worth retaining in one’s portfolio.
However, an unfavorable return on capital and ongoing expense growth suggest a cautious approach. Despite this, given its growth prospects and effective capital deployment, the time appears right for potential investors to hold on to this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.