Are CME Group Shares Still a Good Value?:
These financial instruments are popular with market participants because they often provide leverage CME Group – the ability to borrow money to increase potential returns (and losses) – making it easier to build large positions because you don’t have all the money for them. . . According to the company’s findings, usage of these products may have peaked 12 months ago, and many of the financial metrics are now struggling to grow.
At the moment, the financial market mainly trades online, with the physical holes – where eager traders yell at each other – slowly disappear. Some still exist and one of the largest entrepreneurs is the CME Group of Chicago (NASDAQ: CME). The company operates the largest derivatives market in the world, where investors can access futures and options contracts on thousands of underlying products. CME Globex, the online part of the company, represents about 90% of the total volume.
The CME Group’s largest product line by volume is the interest rate, where it offers futures and options contracts on various benchmark products, including government bonds and federal fund rates. Over the past 12 months, interest rate-related products have accounted for 30-50% of total volume in each quarter. It has been declining since the first quarter of 2021 as the volatility of wild moves declined during the early stages of the pandemic.
Since ECM earnings come from earnings, it doesn’t matter if interest rates go up or down. However, when expectations are high, investors tend to make the biggest adjustments to their portfolios. As the Federal Reserve will soon begin to implement changes in monetary policy, the CME may see an increase in interest rate market activity.
The volume of energy products also peaked in the first quarter of 2021, when the oil price dropped to zero and then turned negative. In comparison, in the first quarter of 2021, volume fell by nearly 27% year-on-year.
These declines coincide with more subdued market activity and are also reflected in the profits of major brokers such as Interactive Brokers, which also apparently lost some momentum after hitting a record high in 2021.
Still financial photo
CME Group’s total revenue also appears to have peaked in the first quarter of 2021 due to increased volatility during the pandemic, when the company would have received the largest compensation. They rose slightly in the first quarter of 2021 but still remain about 18% below their highs.
The average interest rate per contract, the average amount the CME receives on each derivative contract traded, fell to its lowest level in the last 12 months of the quarter. Due to the strong increase in daily volumes, productivity gradually increased, but the volume is also 19% lower than last year’s record. Overall, all of these key metrics were smaller year-over-year, and the next two quarters will show whether lower highs will also lead to lower lows.
Financial market activity is generally cyclical, meaning that some parts of the year are more intense than others. The first quarter is usually the busiest, as investors adjust their positions at the start of the new year, as well as before the spring and summer when many market participants are slowing down (or planning). For this reason, the mid-year is usually the quietest and these trends are reflected in CME Group’s sales and volumes.
As a result of the growth, the company’s annual revenue grew by an average of 8.2% per year between 2016 and 2020. Growth was low in 2020 (albeit at a higher level) with the closure of public protest sources, i.e. about 10% of the total daily volume may have been lost, although some may have migrated online. Given the result for the first quarter of 2021, it seems that sales could really fall this year as the CME is in the quieter part of the year compared to the first quarter of 2020.
looking for value
Despite these results, the stock is trading just below Monday’s high. At $5.33 in earnings per share in 12 months, it traded 41 times, but the last time the stock price was at this level (January 2020), the multiple was about 36 times. Therefore, today it is more expensive, even if the company earns less and the income fluctuates at the same level.
Interest rates are lower today than in 2019 and broader markets are generally trading higher. However, investors should consider paying current historical valuations. The growth potential currently appears limited.
In fact, the market needs periods of greater volatility to increase the CME Group’s trading volume and thus revenues from it. However, the most likely scenario is the continuation of sideways movement in the company’s key financial measures.