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CME Stock Trading at Discount to Industry at 22.46X: Should You Buy?
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CME Group’s (CME - Free Report) shares are trading at a discount to the Zacks Securities and Exchange industry. Its forward price-to-earnings of 22.46X is lower than the industry average of 23.96X.
This company has a market capitalization of $80.5 billion. The average volume of shares traded in the last three months was 2 million.
Image Source: Zacks Investment Research
The stock remains attractively valued compared with other players like ICE Intercontinental Exchange Inc (ICE - Free Report) and Cboe Global Markets (CBOE - Free Report) .
CME shares have gained 14% in the past three months, underperforming its industry but outperforming the sector and the Zacks S&P 500 composite’s return in the same time frame. Its strong global presence, a compelling product portfolio, focus on over-the-counter clearing services and a solid capital position drive CME shares.
CME Vs Industry, Sector and S&P 500 in 3 Months
Image Source: Zacks Investment Research
CME Trading Above 50-Day Moving Average
CME shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
Positive Analyst Sentiment Instills Confidence in CME
The Zacks Consensus Estimate for 2024 and 2025 earnings has increased by 0.8% and 0.4%, respectively, in the past seven days.
Factors Favoring CME
CME Group’s strength lies in its organic growth. Increasing clearing and transaction fees should drive the top line. We estimate the 2026 top line to record a three-year CAGR of 4.7%.
CME has a 90% market share of global futures trading and clearing services. It is witnessing growth in electronic trading volume and higher adoption of crypto assets with increased interest across the entire crypto economy. Clearing and transaction fees, which contribute the major share to the top line, continue to benefit from increased volatility that aids trading volumes. We estimate clearing and transaction fees to increase at a three-year CAGR (2023-2026) of 4.2%.
CME’s investments are also showing desirable results. CME is focusing on improving margins through cost management. It expects its core expense to be $1.585 billion in 2024.
A solid capital position continues to support CME Group in accelerating organic market data growth, expanding its product breadth and engaging in capital deployment.
CME Group has been distributing wealth to shareholders by increasing payouts. It hiked dividends at a five-year CAGR of 8.9%. Its dividend yield is 2.1%, better than the industry’s average of 1.5%, making the stock an attractive pick for yield-seeking investors. Also, CME Group pays five dividends per year, with the fifth being variable and based on excess cash flow in a year.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.
CME’s Return on Capital
Return on invested capital hovered around 10% over the last few years, reflecting CME’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 0.5%, comparing unfavorably with the industry’s average of 4.9%.
CME’s return on equity (ROE) has been improving over the last many years, reflecting its efficiency in utilizing shareholders’ funds. However, the trailing 12 months ROE was 12.8%, which compared unfavorably with the industry average of 13.2%.
Risks to CME
Despite the upside potential, there are a few factors that investors should keep an eye on.
CME is exposed to concentration risk. Although the company has diversified its product array, it is still immensely dependent on trading volumes from two product lines — Interest rates and Equities — for a significant portion of its clearing and transaction fee revenues.
CME Group operates in a highly competitive industry. The company expects competition to increase, given changes in regulatory reforms. While the derivatives exchange business is likely to see competition from the crypto platform, alternative instruments and the cash markets business face competition from other electronic communication networks, single-dealer platforms and bank-owned multi-participant platforms.
Average Target Price for CME Suggests a Downside
Based on short-term price targets offered by 17 analysts, the Zacks average price target is $216.76 per share. The average suggests a potential 3.1% downside from Wednesday’s closing price of $223.57.
Parting Thoughts
CME is the largest futures exchange in the world in terms of trading volume as well as notional value traded. Efforts to expand futures products in emerging markets, diversify derivative product lines and global reach, its OTC offerings, increased electronic trading, cross-selling through alliances, strong global presence and solid liquidity poise CME well for growth.
Yet, unfavorable return on capital, concentration risk and intense competition pose a risk. A lower target price reflects the muted sentiment of analysts.
Image: Bigstock
CME Stock Trading at Discount to Industry at 22.46X: Should You Buy?
CME Group’s (CME - Free Report) shares are trading at a discount to the Zacks Securities and Exchange industry. Its forward price-to-earnings of 22.46X is lower than the industry average of 23.96X.
This company has a market capitalization of $80.5 billion. The average volume of shares traded in the last three months was 2 million.
Image Source: Zacks Investment Research
The stock remains attractively valued compared with other players like ICE Intercontinental Exchange Inc (ICE - Free Report) and Cboe Global Markets (CBOE - Free Report) .
CME shares have gained 14% in the past three months, underperforming its industry but outperforming the sector and the Zacks S&P 500 composite’s return in the same time frame. Its strong global presence, a compelling product portfolio, focus on over-the-counter clearing services and a solid capital position drive CME shares.
CME Vs Industry, Sector and S&P 500 in 3 Months
Image Source: Zacks Investment Research
CME Trading Above 50-Day Moving Average
CME shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
Positive Analyst Sentiment Instills Confidence in CME
The Zacks Consensus Estimate for 2024 and 2025 earnings has increased by 0.8% and 0.4%, respectively, in the past seven days.
Factors Favoring CME
CME Group’s strength lies in its organic growth. Increasing clearing and transaction fees should drive the top line. We estimate the 2026 top line to record a three-year CAGR of 4.7%.
CME has a 90% market share of global futures trading and clearing services. It is witnessing growth in electronic trading volume and higher adoption of crypto assets with increased interest across the entire crypto economy. Clearing and transaction fees, which contribute the major share to the top line, continue to benefit from increased volatility that aids trading volumes. We estimate clearing and transaction fees to increase at a three-year CAGR (2023-2026) of 4.2%.
CME’s investments are also showing desirable results. CME is focusing on improving margins through cost management. It expects its core expense to be $1.585 billion in 2024.
A solid capital position continues to support CME Group in accelerating organic market data growth, expanding its product breadth and engaging in capital deployment.
CME Group has been distributing wealth to shareholders by increasing payouts. It hiked dividends at a five-year CAGR of 8.9%. Its dividend yield is 2.1%, better than the industry’s average of 1.5%, making the stock an attractive pick for yield-seeking investors. Also, CME Group pays five dividends per year, with the fifth being variable and based on excess cash flow in a year.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.
CME’s Return on Capital
Return on invested capital hovered around 10% over the last few years, reflecting CME’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 0.5%, comparing unfavorably with the industry’s average of 4.9%.
CME’s return on equity (ROE) has been improving over the last many years, reflecting its efficiency in utilizing shareholders’ funds. However, the trailing 12 months ROE was 12.8%, which compared unfavorably with the industry average of 13.2%.
Risks to CME
Despite the upside potential, there are a few factors that investors should keep an eye on.
CME is exposed to concentration risk. Although the company has diversified its product array, it is still immensely dependent on trading volumes from two product lines — Interest rates and Equities — for a significant portion of its clearing and transaction fee revenues.
CME Group operates in a highly competitive industry. The company expects competition to increase, given changes in regulatory reforms. While the derivatives exchange business is likely to see competition from the crypto platform, alternative instruments and the cash markets business face competition from other electronic communication networks, single-dealer platforms and bank-owned multi-participant platforms.
Average Target Price for CME Suggests a Downside
Based on short-term price targets offered by 17 analysts, the Zacks average price target is $216.76 per share. The average suggests a potential 3.1% downside from Wednesday’s closing price of $223.57.
Parting Thoughts
CME is the largest futures exchange in the world in terms of trading volume as well as notional value traded. Efforts to expand futures products in emerging markets, diversify derivative product lines and global reach, its OTC offerings, increased electronic trading, cross-selling through alliances, strong global presence and solid liquidity poise CME well for growth.
Yet, unfavorable return on capital, concentration risk and intense competition pose a risk. A lower target price reflects the muted sentiment of analysts.
Thus, it is better to adopt a wait-and-see approach for this Zacks Rank #3 (Hold) stock in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.