In a Volatile 1st Quarter, CME Group Might Be the Big Winner

The first quarter of the year was a real roller coaster ride in the U.S. equity markets.  A big run-up in January was followed by an even bigger slide in February.  After peaking at 2782 on January, the S&P 500 index plunged to 2581 on February 8th.  Unfortunately, the nauseating ride wasn’t over and we saw several more large daily moves throughout February and March that helped move the CBOE volatility index (VIX – the market’s “fear gauge”) to a peak of 37 – a multi-year high.

Things have settled down considerably recently, with the S&P 500 basically unchanged on the year and the VIX back in the mid-teens – close to its historical average.

Clearly a lot of money changes hands during the tumultuous first quarter of 2018, and big banks Q1 results show it.  Both Goldman Sachs (GS) and Morgan Stanley (MS) beat Zacks Consensus Sales Estimates, aided by improved trading and brokerage revenue.

But what other companies might be the beneficiaries of the wild ride of the past few months?

Let’s take a look at an exchange that facilitates the trades that occur during volatile periods.

Chicago Trading Powerhouse

Since its inception as the Chicago Butter and Egg Board in 1898, the Chicago Mercantile Exchange (CME) has been a constant innovator in the creation and trading of futures and options products. After a merger with its crosstown rival the Chicago Board of Trade in 2007 and the acquisition of the New York mercantile Exchange (NYMEX) and the New York Commodities Exchange (COMEX) in 2008, the CME has emerged as the world’s leading marketplace for derivatives on agricultural commodities, equity indexes, interest rates, currencies, oil and precious metals.

The CME makes approximately 86% of its revenues from transaction and clearing fees on trades – with the balance coming from access/communication fees and selling market data.

During periods of market volatility, market participants of all stripes turn to the CME’s deep and liquid markets to hedge risk and/or speculate on future price movements.  

Originally an open outcry exchange where traders and brokers transacted business in person on a trading floor, the CME now does upwards of 90% of its volume on its Globex electronic platform. “The Merc” as it’s known to Chicago locals consistently outpaces similar exchanges CBOE Global Markets (CBOE) and the Intercontinental Exchange (ICE).

The first Quarter of 2018 was no exception.  

Growing Volumes Equal Growing Revenues

Thanks to huge interest in Interest Rate and Equity futures and options, the CME has increased trading volumes in 2018 by 28% over the same period in 2017.  Because its cost structure is relatively fixed, a big portion of additional trading volumes goes straight to the bottom line.

Here are the 2018 YTD volume figures from the CME website:

                                                                                                  

Zacks consensus Estimates for CME’s revenue from transaction and clearing fees in Q1 is $ 865M, an increase of 9% from the $ 792M they reported in Q1 of 2017.  

                                                                                           

A quick look at the volume data shows that 1.35 Billion contracts have traded at the CME so far this year, almost 28% higher than the same period in 2017.  

Analysts are taking notice with 4 upgrades in the past 30 days, bringing the Zacks Consensus Earnings Estimate for 2018 to $ 6.86/share from $ 6.22/share 90 days ago and 44% higher than the $ 4.77/share reported in 2017.

                                                                                                      

Rising earnings estimates are a bullish indicator for a stock’s price and thanks to these upgrades, CME earns a Zacks Rank #1 (Strong Buy).
 

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Morgan Stanley (MS): Free Stock Analysis Report
 
Intercontinental Exchange Inc. (ICE): Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
 
CME Group Inc. (CME): Free Stock Analysis Report
 
Cboe Global Markets, Inc. (CBOE): Free Stock Analysis Report
 
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