CME Group (CME) 2013 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 12-20% 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]

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

(3) geographic expansion particularly in emerging markets.

Negatives:

(1)    vulnerability to trading volumes,

(2)    exposure to interest rate volatility,

(3)    low barriers to entry in electronic trading.

            (4)   government regulations.

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        Dividend         Payout      # Increases  

                   Yield      Growth Rate     Ratio        Since 2003

CME           3.4%          13                  55%              7

Ind Ave       2.6             6*                  31                NA 

                Debt/                      EPS Down       Net        Value Line

               Equity         ROE      Since 2003      Margin       Rating

CME          9%              5             2                 37             A

Ind Ave      51              11           NA               14            NA

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

     Chart

            Note: CME stock made a quick initial recovery off the March 2009 low, surpassing the downtrend off its December 2007 high (red line).  However, it struggled to make further progress, having not yet successfully challenged the November 2008 trading high (green line).  Long term, CME is in a trading range (the straight blue line is the lower boundary).  Intermediate term, it is in a trading range (purple lines).  It is in two shorter term uptrends, though the upper boundary of its intermediate term trading range is acting as resistance. The wiggly blue line is on balance volume.  The Dividend and Aggressive Growth Portfolios own a 75% position in CME, having made a trading sale in 2010 when the stock failed to penetrate the upper boundary of its intermediate term trading range for the third time.  The upper boundary of its Buy Value Range is $31.  The lower boundary of its Sell Half Range is $119.

http://finance.yahoo.com/q?s=CME

3/13