CME Group (CME) stock has risen for two consecutive months and is hovering near its highest point since March 2022. It has jumped by over 43% from its lowest point in 2023, giving it a market cap of over $78 billion.
Strong market share
CME Group is a large company that provides futures and options trading solutions to customers mostly from the United States and Europe.
It operates its business in two main divisions: clearing and transactions and market data and information services.
Its main business is in interest rates followed by equity indices, energy, agricultural commodities, forex, and metals. Its interest rates business makes more money than the other divisions combined.
CME Group has some of the best fundamentals in the financial services industry. For example, it has some of the highest margins, which are higher than popular technology companies like Microsoft, Apple, and Meta Platforms.
According to SeekingAlpha, CME Group has a gross margin of 100% and an EBITDA margin of 70%. It also has a net income margin of 57%, higher than the sector average of 22.50%.
CME Group’s net profit margin is even higher than Cboe Market’s gross margin, which is notable since the two companies are in the same industry. It also has a levered free cash flow margin of 42%, higher than the industry median of 18%.
FMX launch
A key risk for the company is that competition is about to rise with the upcoming launch of FMX by BGC Group, a firm associated with Cantor Fitzgerald. Its top partners are companies like Goldman Sachs, Morgan Stanley, Barclays, Citigroup, and Citadel Securities.
These companies have invested $172 million in FMX and have a 26% stake. The rest is owned by BGC. According to its presentation, FMX hopes to follow the blueprint of companies like Tradeweb and Marketaxess that have a big market share in the bond trading industry.
FMX hopes to become a success story in the interest rates and forex industry by offering better prices, focusing on global distribution, and by partnering with its equity investors, who invest billions of dollars a day.
Therefore, the CME Group stock has mostly underperformed the market because of the ongoing competition fears. However, while FMX Futures will take some market share in the interest rate market, I suspect that CME will maintain its share because of its scale and years in the industry.
CME Group is still growing
In addition to having a large market share in key industries, CME Group is still growing, as evidenced by the recent financial results.
The data shows that its revenue for the quarter rose to $1.53 billion from $1.36 billion in the same quarter in 2023. For the first half of the year, CME’s revenue rose to $3.02 billion from $2.8 billion in the same period in 2023.
Most of CME’s revenue came from its clearing and transaction fees, which came in at $1.25 billion. It was followed by its market data and information services, which jumped to $175 million from $163 million in 2023.
Because of its strong margins, CME Group’s revenue of $1.53 billion translated to a net profit of $883 million while its basic earnings per share was $2.53.
Analysts believe that CME Group’s revenue will continue growing, reaching $6 billion and $61.8 billion in 2025 and 2026, respectively. Its EPS is expected to get to $9.94 and $10.08.
A great compounder
The other important case for the CME stock is that it is one of the top compounders in terms of dividends in the industry. It has a trailing dividend yield of 4.5% and a payout ratio of 46%. It has grown its dividend for 13 straight years, and barring any major event, it will become a dividend aristocrat in the next twelve years.
CME also has a good balance sheet with over $1.7 billion in cash and equivalents, $749 million in short-term debt, and $2.6 billion in long-term debt.
CME’s valuation is also relatively stable, with a trailing and forward PE ratios of 24 and 23. However, its stock price is in line with the average estimate by Wall Street analysts.
CME Group stock analysis
CME chart by TradingView
The weekly chart shows that the CME share price has done well in the past few months. It rose to a high of $218, an important level in March this year. The stock has remained above the 50-week and 200-week moving averages.
It has an ascending triangle chart pattern. The MACD indicator has moved above the neutral point while the Relative Strength Index (RSI) has moved above the neutral level.
Therefore, the outlook for the stock is bullish, with the next point to watch being at $230, its all-time high. It will do well after the Federal Reserve starts to cut interest rates.
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